FSR Report Electricity TSOs Future

FLORENCE
SCHOOL OF
REGULATION
A conceptual framework
for the evolution of the
operation and regulation
of electricity transmission
systems towards a
decarbonised and
increasingly integrated
REPORT
RESEARCH
electricity system in the EU

Authors: Jean-Michel Glachant, Jorge
Vasconcelos and Vincent Rious
fsr.eui.eu
Executive Summary
The electricity industry is undergoing major changes mainly dictated by the need to simultaneously
accomplish integration of European energy markets and build a low‐carbon economy. This process
was facilitated if not initiated by a wave of technological innovation. In order to ensure a timely,
orderly and efficient transition towards the new low-carbon landscape the present legal and
regulatory frameworks, devised long ago, must be reviewed and adapted in order to provide
adequate rules and suitable incentives.
The purpose of this report is to help relevant stakeholders to take a leading role in transforming the
way electricity systems are managed and operated in order to meet the twin targets of
decarbonisation and increased market integration in the most efficient way. Because there are many
uncertainties and some degrees of freedom as regards policy choices and their implementation,
diverse future scenarios are conceivable. Instead of selecting one scenario and suggesting a
mandatory approach, this report offers:
a) A conceptual framework to assess and compare different options, showing the impact of
different structural changes upon governance and regulation of electricity systems and
markets.
b) Useful checkpoints and recommendations aimed at safeguarding the internal coherence of
any selected scenario.
Although several alternative paths may lead to decarbonisation and integration of present electricity
systems, each path presents its own governance and regulatory challenges and it commands
specific actions. Decision-makers are free to favour, endorse or even determine any given “feasible”
political or technological path. However, once they have taken this primordial decision, their
subsequent choices should be compatible with objective - and unfortunately complex - technical,
economic and institutional constraints of electricity systems and markets. Any lack of internal
consistency will make energy transition unnecessarily costly and protracted. The main goal of this
report is to help decision-makers steering energy transition along a coherent course.
The transition towards low-carbon energy systems requires not only new rules, but also new roles. In
particular, the role of transmission networks and the role of transmission system operators are
changing and need to evolve even faster over the coming years. Given the different time-scales for
investments in generation and in networks, any successful energy transition wishing to preserve
current reliability standards requires timely and coherent adjustments of the role played by
Transmission System Operators (TSOs). The recommendations provided take into account the need
to ensure a dynamic balance between the “creative destruction” of market forces and technological
innovation, on the one hand, and the intrinsic stringency of power system reliability governance, on
the other hand.
In order to better grasp some structural novelties of the new world we are entering in and to identify
major critical issues, the report first introduces three basic conceptual scenarios:
- Lower decarbonization within a pan-European system
- Higher decarbonization within existing Member State systems
- Higher decarbonization within decentralized systems
They correspond to three “ideal types” (extreme scenarios), not to “most likely outcomes”. It is
assumed that reality will most probably be a combination of these three basic scenarios. Hybridation
1
may happen “by design” (i.e., because decision-makers consciously opt for a hybrid model) or “by
accident” (i.e., because decisions being taken by different agents at different places and at different
points in time result in a dynamic hybrid outcome that does not correspond to the expected outcome
of any individual agent).
For each scenario, the report discusses in detail how the main functions and interactions of
European TSOs need to change and how these changes differ between the three scenarios. The
report analyses both the “hardware side” and the “software side”:
- The “hardware” side means network planning, building infra-structure assets, managing electricity
transmission, etc. – i.e., the traditional, strongly investment-related and therefore heavily regulated
functions.
- The “software” side includes, generally speaking, all procedures needed to manage system
operation, to facilitate market operation at the interface with market operators, Distribution System
Operators (DSOs) and other players in the power system – i.e. the more evolutionary, less capital-
intensive, rules-related functions.
This two-side analysis enables the reader to fully realize the possible impact of structural changes
upon the functioning of power systems, the functions performed by different actors and overall
governance.
None of the three basic scenarios is fully consistent with the present “legacy framework” and they all
require substantial changes in terms of governance mechanisms and regulatory policies. Aware of
the weaknesses of the “hybridation” actually growing in the EU, either “by design” or “by accident”,
the report introduces a set of “checkpoints” aimed at ensuring critical levels of coherence,
consistency and resilience along the energy system journey towards a 2050 low-carbon future.
Although all three scenarios were constructed in order to fulfil EU energy and climate policy
objectives, no individual scenario can easily fully meet all goals at reasonable cost. Societal
expectations, technological developments and public policies are not necessarily and not always
aligned, therefore this difficulty should be no surprise.
As regards the internal coherence or self-consistency of each scenario, two points deserve special
attention:
1) Some critical system operational functions, currently mainly performed by national TSOs, will be
totally or partially performed by other entities. These entities may be supra-national
organizations, either emanating from or acting in close cooperation with TSOs, DSOs
(individually or somehow associated) or even new players. Therefore, the legal and regulatory
frameworks must be adapted, namely in order to:
a) Clearly define and assign each operational function, indicating, for each, appropriate cost
and liability sharing mechanisms.
b) Establish appropriate coordination mechanisms, for both normal and abnormal situations,
including appropriate redundancy safeguards and supervision tools.
2) Even if from the technical (system operation) point of view it is theoretically possible to ensure
appropriate system reliability (assuming that the necessary legal and regulatory changes are
implemented), several “black holes” may still jeopardize the efficient functioning of electricity
systems and markets. The report discusses how to patch them.
Assuming that, in the short-term, implementation of 3rd Package legislation and associated Network
Codes will continue and no fundamentally new legislation will be issued, serious governance issues
2
must be somehow addressed. In this respect, not only national/EU interfaces require continuous
attention; local/national interfaces become increasingly critical for transparency and reliability.
Among the many governance challenges to be addressed the following ones are particularly
important:
- Regionalisation and Europeanisation of grid planning, system and market operation, leading to
better coordination or mutualisation of hardware and software TSOs functions, as well as of the
NRAs actions.
- Member States policies regarding security of supply and generation adequacy.
- Articulation between Member States “2030 NAPs”, network investments, systems and markets.
- Articulation of local and national grids, systems and pocket markets, implying new forms of multi-
layer coordination between DSOs, TSOs, NRAs and Member States.
In the past, voluntary, informal cooperation among major actors (namely the European Commission,
regulators and TSOs) has been crucial for the development of the internal energy market. This kind
of cooperation can still deliver substantial results on the road to decarbonisation. However, the
speed of delivering the many missing “building blocks” for the proper functioning of the system (from
planning to real-time operation) needs to be considerably increased in the short-term.
After several years of high retail energy prices, consumers may have accepted the inevitability of this
trend and, to some extent, they have already adapted their behaviours to this new reality. However,
the increasing dependence of economic and social life upon electrical devices makes security of
supply and reliability an absolute priority for all consumers. For the energy transition to succeed,
governance and regulatory mechanisms have to be quickly adapted and partially redesigned with
this “absolute must” in mind.
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4
Table of Contents
Introduction........................................................................................................................................................................................ 9
1. Major trends affecting the role of TSOs in a low-carbon energy landscape ................................................ 11
1.1 The role and functions of TSOs in the current system and market structures ................................. 12
1.1.1 The development of the European model 1996-2015 ...................................................................... 13
1.1.2 The European legal framework .................................................................................................................. 21
1.1.3 The European “regulatory” framework .................................................................................................. 31
1.1.4 The functions of European TSOs today ................................................................................................... 37
1.1.5 Voluntary regional cooperation among system operators ............................................................. 45
1.2 Major trends shaping the transition towards a low-carbon energy landscape ............................... 47
1.3 The supply-side and the demand-side revolutions...................................................................................... 50
1.3.1 The supply-side revolution .......................................................................................................................... 50
1.3.2 The demand-side revolution........................................................................................................................ 54
1.4 Policies, markets and the system operation ................................................................................................... 56
1.5 Three scenarios for the evolution of the European electricity system ................................................ 58
2. The role of transmission networks in a low-carbon energy landscape – Hardware functions................ 65
2.1 Connecting the dots – connection of network users … ............................................................................... 65
2.1.1 …in scenario A of lower decarbonisation within a pan-European system ............................... 67
2.1.2 … in scenario B of higher decarbonisation within existing Member States systems ........... 68
2.1.3 … in scenario C of higher decarbonisation within decentralised systems................................ 70
2.1.4 Comparing the grid connection function in the three scenarios .................................................. 71
2.2 Merging the meshes – network expansion and maintenance … ............................................................. 72
2.2.1 … in scenario A of lower decarbonisation within a pan-European system .............................. 72
2.2.4 Comparing the network expansion and maintenance function in the three scenarios....... 77
2.3 Managing the slots – provision of ICT for proper system operation .................................................... 77
2.3.4 Comparing the ICT investment function in the three scenarios ................................................... 83
3. The role of transmission networks in a low-carbon energy landscape – Software functions ............. 85
3.1 System operation and horizontal coordination between TSOs ….......................................................... 85
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3.1.4 Comparing the system operation function in the three scenarios ............................................... 94
3.2 Interactions with other players in the power system supply chain...................................................... 96
3.2.4 Comparing the interactions between the TSO and the other stakeholders the in the three
scenarios................................................................................................................................................................................101
4. The case for a “hybrid scenario” and the corresponding checkpoints for an “Energy Union” low-
carbon transmission framework...........................................................................................................................................103
Introduction...................................................................................................................................................................................103
4.1 Overview of the three conceptual scenarios .................................................................................................105
4.1.1 A) A scenario of “full Europeanisation but low decarbonisation”..............................................107
4.1.2 B) A scenario of national decarbonisation ...........................................................................................109
4.1.3 C) A scenario of deeply local decarbonisation....................................................................................111
4.2 Consistency and feasibility of the three basic scenarios..........................................................................113
4.3 The case for a “Hybrid scenario”........................................................................................................................115
4.3.1 Is there any “hybrid” scenario to regroup the best of all three conceptual worlds? ..........115
4.3.2 While the “MS national” scenario is less hypothetical, it has serious weaknesses .............116
4.3.3 The three conceptual scenarios are more conceptual than actual.............................................117
4.3.4 Conceptually, hybridation is mainly a phase of difficulty and transition................................117
4.3.5 Towards an EU Regulation 2.0. .................................................................................................................117
4.4 Checkpoints for the launching of an “Energy Union” system and “grid framework”...................118
4.4.1 Recommended checkpoints to better articulate the local level with the national level vis-
à-vis the three main EU policy goals ..........................................................................................................................120
4.4.2 Recommended primary checkpoints to better articulate the national level with the EU
level, vis-à-vis the three main EU policy goals.......................................................................................................122
4.4.3 Recommended checkpoints to better articulate the EU level with the local level ..............124
4.4.4 Secondary checkpoints for better governance between the local and the national level 127
4.4.5 Secondary checkpoints for better governance between the national and the EU level ....129
4.4.6 Secondary checkpoints for better governance between the local and the EU levels .........133
5. General Conclusions .........................................................................................................................................................135
References ......................................................................................................................................................................................139
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Index of Figures
Fig. 1: The EU legal framework – electricity....................................................................................................................... 31

Fig. 2: The typical national legal framework - electricity ............................................................................................. 31
Fig. 3: Development process of Network Codes .............................................................................................................. 32
Fig. 4: Overview of Network Codes under development .............................................................................................. 33
Fig. 5: Network Codes development status (July 2015) ............................................................................................... 34
Fig. 6: Implementation of CRM across Europe. Source: Eurelectric, 2014 ............................................................ 36
Fig. 7: TSC - TSO Security Cooperation ................................................................................................................................ 46
Fig. 8: Comparison of costs and net benefits of selected technical solutions ....................................................... 48
Fig. 9: Electricity generation capacities in EU-28 ............................................................................................................ 51
Fig. 10: Map of main bottlenecks in the European electricity grid ........................................................................... 52
Fig. 11: System services reserve as a part of NGC evolution. ...................................................................................... 53
Fig. 12: GIC in relation to GDP. ................................................................................................................................................. 54
Fig. 13: Share of electricity in the current trend and decarbonisation scenarios (in % of final energy
demand)................................................................................................................................................................................... 55
Fig. 14: Three scenarios for the evolution of the European electricity system ................................................... 58
Fig. 15: Power flows through the Belgian power network, 14th July 1999 .......................................................... 87
Fig. 16: Market design specific reasons for ID trading in Germany: The Sunrise Quarters ............................ 90
Fig. 17: “The Sunrise Quarters” causing a systematic daily price pattern (Volume weighted average
prices for quarters) ............................................................................................................................................................. 91
Fig. 18: Critical interfaces.........................................................................................................................................................120
Index of Tables
Table 1: Main contents of current electricity Network Codes ................................................................................... 35
Table 2: Summary of functions currently performed by European TSOs .............................................................. 44
Table 3: Main characteristics of scenario A: Lower decarbonisation within a pan-European system ...... 59
Table 4: Main characteristics of scenario B: Higher decarbonisation within existing MS systems ............ 61
Table 5: Main characteristics of scenario C: Higher decarbonisation within decentralised systems ........ 63
Table 6: Grid connection function in the three scenarios ............................................................................................. 71
Table 7: Network expansion and maintenance function in the three scenarios ................................................. 77
Table 8: ICT investment function in the three scenarios .............................................................................................. 83
Table 9: System operation function in the three scenarios ......................................................................................... 95
Table 10: Interactions between the TSO and the other stakeholders in the three scenarios ......................101
Table 11: Overview of the main structural, governance and regulatory characteristics of the three basic
conceptual scenarios ........................................................................................................................................................106
Table 12: TSO functions transformation in scenario A - full Europeanisation but low decarbonisation
...................................................................................................................................................................................................108
Table 13: TSO functions transformation in scenario B - Member States driven national decarbonisation
...................................................................................................................................................................................................110
Table 14: TSO functions transformation in scenario C - local decarbonisation ................................................112
Table 15: Scenarios consistency check...............................................................................................................................114
Table 16: Primary checkpoints ..............................................................................................................................................119
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Index of Boxes
Box 1: Transmission system operation in the 1996 Directive.................................................................................... 15

Box 3: Transmission system operation in the 2003 Regulation ................................................................................ 19
Box 4: Energy in the Treaty on the Functioning of the European Union................................................................ 22
Box 5: Definitions provided by current EU legislation .................................................................................................. 23
Box 7: Transmission system operation in the 2009 Directive................................................................................... 26
Box 8: Collective EU transmission system operation in the 2009 Regulation ..................................................... 27
Box 9: Specification of TSO obligations at EU level ......................................................................................................... 29
Box 10: Basic types of EU secondary legislation ............................................................................................................. 30
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Introduction
The electricity industry is currently undergoing major changes. The transformation is mainly dictated
by the need to simultaneously accomplish the integration of European energy markets and build a
low‐carbon economy, which has been facilitated, if not initiated, by a wave of technological change.
This policy goal has been translated into several documents approved by the European Union and
established quantitative targets for 2020, 2030 and 2050 in terms of, i.e., greenhouse gas emissions
and the share of renewable energy in total energy consumption. However, the present legal and
regulatory frameworks are not considered to provide adequate rules or suitable incentives for a
timely, orderly and efficient transition; in fact, even if all EU legislation and network codes had been
properly implemented, they would not be fit for the new low-carbon landscape. Therefore, the legal
and regulatory frameworks must be adapted, taking into account not only the internal market and
energy and climate policy objectives, but also recent technological developments.
The “Energy Union” project recently launched by the European Commission aims at reconciling
these different objectives, improving the coherence and speed of the transition towards low-carbon
energy systems, while taking into account the new technological trends, the growing concerns about
energy independence, the efficient use of endogenous resources and the fair allocation of the costs
and benefits of the EU energy and climate policy.
The purpose of this report is to help the relevant stakeholders to take a leading role in transforming
the way power systems are managed and operated in order to meet the twin targets of
decarbonisation and increased market integration in the most efficient way. Because there are many
uncertainties, and some level of freedom as regards policy choices and their implementation, diverse
future scenarios are conceivable. Therefore, the present report provides a set of recommendations
about appropriate regulatory paths and incentives that are conducive to different scenarios. The
report does not prescribe a mandatory solution – it offers a conceptual framework to assess and
compare different options.
The transition towards low-carbon energy systems requires not only new rules, but also new roles. In
particular, the role of transmission networks and the role of transmission system operators are
changing and need to evolve even faster over the coming years. The different time-scales for
investments in generation and in networks should also be kept in mind.
The analysis and recommendations provided in this report take into account the current
diversification of agents in charge of the system operation (System Operators - SOs, Independent
System Operators - ISOs, RSCIs – Regional Security Coordination Initiatives – etc.) at both national
and supra‐national levels. They also consider the need to ensure a dynamic balance between the
“creative destruction” of market forces and technological innovation, on the one hand, and the
intrinsic stringency of power system reliability governance, on the other hand.
9
This report is divided into 4 chapters:
Chapter 1 describes the major trends impacting the role of TSOs in a low-carbon energy landscape.
After introducing the present political, legal and regulatory framework, as well as the internal and
external factors shaping the transition to low-carbon electricity systems, recent developments in the
generation mix and in consumption patterns are illustrated. Following a discussion of necessary
market and governance changes, three different future scenarios are presented. It is assumed that
the reality will most probably be a combination of these three “ideal types”1.
Taking into account electricity system developments described in the first chapter and their general
implications, Chapters 2 and 3 discuss how the main functions and interactions of European TSOs
will change and how these changes will differ between the three scenarios. Chapter 2 addresses
the “hardware” side (network planning, building infra-structure assets, managing electricity
transmission, etc. – the traditional, strongly investment-related and therefore heavily regulated
functions), while Chapter 3 focuses on the “software” side (generally speaking, all procedures
needed to manage the system operation, to facilitate the market operation at the interface with
market operators, DSOs and other players in the power system – the more evolutive, less capital-
intensive, rules-related functions).
Finally, Chapter 4 discusses the required regulatory and governance frameworks for each scenario,
providing “checkpoints” and recommendations in order to achieve a smooth and efficient transition
towards low-carbon electricity systems. Finally, the possibility of “hybridation” of the three basic
scenarios is introduced and governance and regulatory requirements needed to ensure coherence
of the transition process are also analysed under this perspective.
1 “Ideal type, a common mental construct in the social sciences derived from observable reality, although not conforming to it in detail
because of deliberate simplification and exaggeration. It is not ideal in the sense that it is excellent, nor is it an average; it is, rather, a
constructed ideal used to approximate reality by selecting and accentuating certain elements.
The concept of the ideal type was developed by German sociologist Max Weber, who used it as an analytic tool for his historical studies.”
http://www.britannica.com/topic/ideal-type
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1. Major trends affecting the role of TSOs in a low-carbon energy landscape
Before the liberalisation of energy markets, the electricity transmission system operation was a little
noticed function, usually performed by relatively small departments within large vertically integrated
utilities.
Liberalisation means competition. Competition - even if only large consumers were initially eligible -
required non-discriminatory access to transmission infrastructure. In order to ensure non-
discriminatory access of both suppliers and eligible consumers, people and assets assigned to the
transmission system operation had to be ring-fenced from other departments within vertically
integrated utilities; their mission had to be clearly defined, their performance properly monitored and
their activity strictly regulated. This process, known as "unbundling", gave transmission system
operators a very strong identity and very high public visibility; their role became clearly identifiable to
all relevant stakeholders. In many countries, governments (e.g. Spain, UK, Norway, Portugal, Italy,
Sweden, Netherlands) or utilities (e.g. Switzerland, Germany) decided to separate transmission
assets from other types of electricity assets, creating new companies dedicated exclusively to the
energy transmission system operation 2 . Ownership unbundling, although not applied in all EU
Member States, contributed to bolstering the identity of a new category of industry actors.
Over the last two decades, each step aimed at enlarging the scope and increasing the intensity of
electricity market liberalisation resulted in more duties and more competences being assigned to
transmission system operators. The 2009 EU electricity Directive (Directive 2009/72/EC)
institutionalised the role of transmission system operators, confirming their vital importance in fully
liberalised markets.
Nowadays, new public policies, new technologies and new consumer attitudes push transmission
system operators towards new horizons and new roles. The present chapter first describes the legal
and regulatory frameworks where TSOs currently perform their functions (Section 1.1); then, a brief
review of the major trends that are impacting the role of TSOs is provided (Section 1.2), followed by
a more specific analysis of changes on the supply and demand sides (Section 1.3). The multiple
interactions between the different drivers for change, electricity markets and the system operation
are discussed in Section 1.4. Finally, Section 1.5 introduces the three scenarios considered for the
analytical work performed in the following Chapters 2 and 3.
2 In some cases these undertakings are responsible for electricity only, in other cases they are in charge of both electricity and natural
gas system operation.
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1.1 The role and functions of TSOs in the current system and market structures
In vertically integrated monopolies the system operation is a straightforward task, merging the
economic dispatch of generators and security objectives under a single control umbrella. A single
entity is responsible for determining the output of each power plant and managing all power flows
through the transmission network, including flows to distribution networks and import/export flows at
interconnectors.
Liberalisation abolishes generation and supply monopolies. Hence, liberalisation brings new players
into the picture and allows power plants to decide how much they want to produce (i.e., to sell, either
bilaterally or to organised markets/power pools). Liberalisation also introduces a strict separation of
generation, network and supply activities (“unbundling”), limiting the scope for vertical integration
and defining the rights and duties of players in each area. In a liberalised framework, market and
security objectives are treated separately and must be reconciled in real-time according to
transparent rules previously agreed, making the system operation a much more complex task as
compared to the monopolistic era.
The system operation is now allowed to interfere with the generators’ output only when their
declared schedule conflicts with the overall system security. However, because the electricity market
consists of several different “market places” (financial, physical, day-ahead, intra-day, balancing,
etc.), the system operation must closely follow all types of market operations, and coordination
between the market operation and system operation becomes increasingly complex. As system
security must prevail over the individual economic interests of market agents, system operators
retain the ultimate responsibility for the well-functioning of electricity markets and systems.
The liberalisation of electricity markets can be achieved in many different ways: how much and how
quickly the market can be opened up usually depends on legislators; how competition is organised
may be defined in several ways and typically evolves over time, following the learning patterns of
market players, market operators, system operators and regulators.
One of the striking features of the European electricity liberalisation process is the absence of
“market design” prescriptions in all directives and regulations, leaving Member States the freedom to
decide how to design and implement national markets. This omission created a certain vacuum at
the European level, since no mandatory “European market design” has been issued - e.g., initially no
rules concerning data exchange between market operators and system operators were available.
The Commission attempted to overcome these difficulties through the promotion of a “Market target
model”, but it arrived at a time when the conflicts between “traditional” market models, on the one
hand, and new EU and national policies, on the other hand, were already rather obvious. In the
meantime, many system operators took a pro-active role, assuming de facto a leading role in the
12
development of the European electricity market through close cooperation with each other, along
with relevant stakeholders.
This Section describes the European case, providing a brief historical perspective, as well as short
descriptions of the current legal and regulatory frameworks in the European Union, and examples of
voluntary cooperation among system operators.
1.1.1 The development of the European model 1996-2015
In 1988, following the 1985 European Council decision to achieve a single market by 1992 and the
1986 Single European Act, the European Commission published the first document on the Internal
Energy Market 3. This working paper stated that “a more integrated European energy market should
reduce energy costs, to the direct benefit of individual consumers, but also of user industries” and, at
the same time, “encourage the maintenance or development within the Community of healthy and
prosperous energy enterprises”, thus improving the security of supply.
The transition from national monopolistic organisations to partially liberalised electricity markets took
more than eight years: the first electricity Directive explicitly defining some “common rules” for the
Internal Energy Market 4 was approved in 19965. The Commission’s approach was mainly based on
the removal of all “obstacles to the internal energy market”, abolishing generation, supply, import
and export monopolies and giving large industrial consumers the right to choose an electricity
supplier from any Member State.
The first electricity Directive basically obliged Member States to “ensure, on the basis of their
institutional organisation and with due regard for the principle of subsidiarity, that, without prejudice
to paragraph 2 [“Member States may impose on undertakings operating in the electricity sector, in
the general economic interest, public service obligations”], electricity undertakings are operated in
accordance with the principles of this Directive, with a view to achieving a competitive market in
electricity, and shall not discriminate between these undertakings as regards either rights or
obligations.” 6 Three approaches to system access were defined (regulated, negotiated and single
buyer), a dynamic minimum threshold for eligibility was introduced and unbundling and the
transparency of accounts was mandated: “Integrated electricity undertakings shall, in their internal
accounting, keep separate accounts for their generation, transmission and distribution activities, and,
3 Working Paper “The Internal Energy Market” COM(88) 238 final of 2 May 1988
4 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal
market in electricity. Official Journal L 027, 30/01/1997.
5 In the meantime (1990), directives on energy price transparency and energy transmission through high-voltage/high-pressure networks
were approved, but their impact was very limited.
6 Article 3 of Directive 96/92/EC
13
where appropriate, consolidated accounts for other, non-electricity activities, as they would be
required to do if the activities in question were carried out by separate undertakings, with a view to
avoiding discrimination, cross-subsidisation and distortion of competition.” 7
As regards the transmission system operation, the first electricity Directive was rather vague (see full
text in Box 1 on page 15). Although the Directive defined “transmission”, “interconnected system”
and “ancillary services”, it did not provide an explicit definition of the “system operation” and even
contained a certain level of circularity – for instance, defining ancillary services as “all services
necessary for the operation of a transmission or distribution system” and a system operator as the
entity “responsible for managing energy flows on the system, taking into account exchanges with
other interconnected systems. To that end, the system operator shall be responsible for ensuring a
secure, reliable and efficient electricity system and, in that context, for ensuring the availability of all
necessary ancillary services.” 8
7 Article 14 of Directive 96/92/EC

8 Articles 2 and 7 of Directive 96/92/EC, respectively
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Box 1: Transmission system operation in the 1996 Directive
CHAPTER IV
Transmission system operation
Article 7
1. Member States shall designate or shall require undertakings which own transmission systems to designate, for a period of time to be
determined by Member States having regard to considerations of efficiency and economic balance, a system operator to be responsible
for operating, ensuring the maintenance of, and, if necessary, developing the transmission system in a given area and its interconnectors
with other systems, in order to guarantee security of supply.
2. Member States shall ensure that technical rules establishing the minimum technical design and operational requirements for the
connection to the system of generating installations, distribution systems, directly connected consumers' equipment, interconnector circuits
and direct lines are developed and published. These requirements shall ensure the interoperability of systems and shall be objective and
non-discriminatory. They shall be notified to the Commission in accordance with Article 8 of Council Directive 83/189/EEC of 28 March
1983 laying down a procedure for the provision of information in the field of technical standards and regulations (7).
3. The system operator shall be responsible for managing energy flows on the system, taking into account exchanges with other
interconnected systems. To that end, the system operator shall be responsible for ensuring a secure, reliable and efficient electricity
system and, in that context, for ensuring the availability of all necessary ancillary services.
4. The system operator shall provide to the operator of any other system with which its system is interconnected sufficient information to
ensure the secure and efficient operation, coordinated development and interoperability of the interconnected system.
5. The system operator shall not discriminate between system users or classes of system users, particularly in favour of its subsidiaries or
shareholders.
6. Unless the transmission system is already independent from generation and distribution activities, the system operator shall be
independent, at least in management terms, from other activities not relating to the transmission system.
Article 8
1. The transmission system operator shall be responsible for dispatching the generating installations in its area and for determining the
use of interconnectors with other systems.
2. Without prejudice to the supply of electricity on the basis of contractual obligations, including those which derive from the tendering
specifications, the dispatching of generating installations and the use of interconnectors shall be determined on the basis of criteria which
may be approved by the Member State and which must be objective, published and applied in a non-discriminatory manner which ensures
the proper functioning of the internal market in electricity. They shall take into account the economic precedence of electricity from
available generating installations of interconnector transfers and the technical constraints on the system.
3. A Member State may require the system operator, when dispatching generating installations, to give priority to generating installations
using renewable energy sources or waste or producing combined heat and power.
4. A Member State may, for reasons of security of supply, direct that priority be given to the dispatch of generating installations using
indigenous primary energy fuel sources, to an extent not exceeding in any calendar year 15 % of the overall primary energy necessary to
produce the electricity consumed in the Member State concerned.
Article 9
The transmission system operator must preserve the confidentiality of commercially sensitive information obtained in the course of
carrying out its business.
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For several reasons, including the lack of detailed technical rules and the absence of any clear rules
on developing a regulatory framework or settling disputes 9, the first Directive did not deliver the
expected results. In order to promote a better understanding of the remaining obstacles, as well as
to facilitate the implementation of voluntary agreements, the Commission decided to set up the
Florence Forum in February 1998. Although the Forum delivered “too little, too late”, it had several
important consequences, namely the creation of some European professional associations,
including ETSO (European Transmission System Operators) in 1999. While a voluntary professional
association, ETSO played a very important role in the development of the Internal Energy Market,
contributing decisively to the new identity of transmission system operators in Europe and across the
globe. In 2009, ETSO was wound up and its tasks transferred to ENTSO-E, a proper European
entity set up in a Directive.
The lack of progress in cross-border electricity trade and the political decision taken by the European
Council in 2000 to fully liberalise some crucial sectors, including energy, within the framework of the
so-called “Lisbon Agenda”, led to the second electricity Directive 10, approved in 2003. This Directive
asked for a full opening of all EU markets, extended to all consumers of any type and any size. A
specific Regulation on cross-border trade was approved at the same time11, within the so-called
“second energy package”. The second electricity Directive and the new Regulation enlarged the
scope and consolidated the common rules for the internal electricity market.
The second energy package finally provides a definition of “transmission system operator”:
“ ‘transmission system operator' means a natural or legal person responsible for operating, ensuring
the maintenance of and, if necessary, developing the transmission system in a given area and,
where applicable, its interconnections with other systems, and for ensuring the long term ability of
the system to meet reasonable demands for the transmission of electricity;” 12
The definition of the tasks and the duties of the transmission system operators is much more
detailed in 2003 as compared to 1996, as can be seen in Boxes 2 and 3 on pages 18-20 and 21-22,
respectively.
9 For a more detailed analysis see Jorge Vasconcelos, ‘Towards a European energy policy’, in Peter Ludlow (ed.), Setting EU priorities
2007, European Strategy Forum, 2007.
10 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market
in electricity and repealing Directive 96/92/EC. O.J. L 176, 15/07/2003
11 Regulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network
for cross-border exchanges in electricity. O.J. L 176, 15/07/2003
12 Article 2, Directive 2003/54/EC
16
CHAPTER IV
TRANSMISSION SYSTEM OPERATION
Article 8
Designation of Transmission System Operators
Member States shall designate, or shall require undertakings which own transmission systems to designate, for a period of time to be
determined by Member States having regard to considerations of efficiency and economic balance, one or more transmission system
operators. Member States shall ensure that transmission system operators act in accordance with Articles 9 to 12.
Article 9
Tasks of Transmission System Operators
Each transmission system operator shall be responsible for:
(a) ensuring the long-term ability of the system to meet reasonable demands for the transmission of electricity;
(b) contributing to security of supply through adequate transmission capacity and system reliability;
(c) managing energy flows on the system, taking into account exchanges with other interconnected systems. To that end, the
transmission system operator shall be responsible for ensuring a secure, reliable and efficient electricity system and, in that context, for
ensuring the availability of all necessary ancillary services insofar as this availability is independent from any other transmission system
with which its system is interconnected;
(d) providing to the operator of any other system with which its system is interconnected sufficient information to ensure the secure and
efficient operation, coordinated development and interoperability of the interconnected system;
(e) ensuring non-discrimination as between system users or classes of system users, particularly in favour of its related undertakings;
(f) providing system users with the information they need for efficient access to the system.
Article 10
Unbundling of Transmission System Operators
1. Where the transmission system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its
legal form, organisation and decision making from other activities not relating to transmission. These rules shall not create an obligation to
separate the ownership of assets of the transmission system from the vertically integrated undertaking.
2. In order to ensure the independence of the transmission system operator referred to in paragraph 1, the following minimum criteria
shall apply:
(a) those persons responsible for the management of the transmission system operator may not participate in company structures of the
integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation, distribution and supply
of electricity;
(b) appropriate measures must be taken to ensure that the professional interests of the persons responsible for the management of the
transmission system operator are taken into account in a manner that ensures that they are capable of acting independently;
(c) the transmission system operator shall have effective decision-making rights, independent from the integrated electricity undertaking,
with respect to assets necessary to operate, maintain or develop the network. This should not prevent the existence of appropriate
coordination mechanisms to ensure that the economic and management supervision rights of the parent company in respect of return on
assets, regulated indirectly in accordance with Article 23(2), in a subsidiary are protected. In particular, this shall enable the parent
company to approve the annual financial plan, or any equivalent instrument, of the transmission system operator and to set global limits
on the levels of indebtedness of its subsidiary. It shall not permit the parent company to give instructions regarding day-to-day operations,
nor with respect to individual decisions concerning the construction or upgrading of transmission lines, that do not exceed the terms of the
approved financial plan, or any equivalent instrument;
17
(d) the transmission system operator shall establish a compliance programme, which sets out measures taken to ensure that
discriminatory conduct is excluded, and ensure that observance of it is adequately monitored. The programme shall set out the specific
obligations of employees to meet this objective. An annual report, setting out the measures taken, shall be submitted by the person or
body responsible for monitoring the compliance programme to the regulatory authority referred to in Article 23(1) and shall be published.
Article 11
Dispatching and balancing
1. Without prejudice to the supply of electricity on the basis of contractual obligations, including those which derive from the tendering
specifications, the transmission system operator shall, where it has this function, be responsible for dispatching the generating
installations in its area and for determining the use of interconnectors with other systems.
2. The dispatching of generating installations and the use of interconnectors shall be determined on the basis of criteria which may be
approved by the Member State and which must be objective, published and applied in a non discriminatory manner which ensures the
proper functioning of the internal market in electricity. They shall take into account the economic precedence of electricity from available
generating installations or interconnector transfers and the technical constraints on the system.
3. A Member State may require the system operator, when dispatching generating installations, to give priority to generating installations
using renewable energy sources or waste or producing combined heat and power.
4. A Member State may, for reasons of security of supply, direct that priority be given to the dispatch of generating installations using
indigenous primary energy fuel sources, to an extent not exceeding in any calendar year 15 % of the overall primary energy necessary to
produce the electricity consumed in the Member State concerned.
5. Member States may require transmission system operators to comply with minimum standards for the maintenance and development
of the transmission system, including interconnection capacity.
6. Transmission system operators shall procure the energy they use to cover energy losses and reserve capacity in their system
according to transparent, non-discriminatory and market-based procedures, whenever they have this function.
7. Rules adopted by transmission system operators for balancing the electricity system shall be objective, transparent and non-
discriminatory, including rules for the charging of system users of their networks for energy imbalance. Terms and conditions, including
rules and tariffs, for the provision of such services by transmission system operators shall be established pursuant to a methodology
compatible with Article 23(2) in a non-discriminatory and cost-reflective way and shall be published.
Article 12
Confidentiality for Transmission System Operators
Without prejudice to Article 18 or any other legal duty to disclose information, the transmission system operator shall preserve the
confidentiality of commercially sensitive information obtained in the course of carrying out its business. Information disclosed regarding its
own activities, which may be commercially advantageous, shall be made available in a non-discriminatory manner.
18
Box 3: Transmission system operation in the 2003 Regulation
Article 3
Inter transmission system operator compensation mechanism
1. Transmission system operators shall receive compensation for costs incurred as a result of hosting cross-border flows
of electricity on their networks.
(...)
Article 4
Charges for access to networks
1. Charges applied by network-operators for access to networks shall be transparent, take into account the need for
network security and reflect actual costs incurred insofar as they correspond to those of an efficient and structurally
comparable network operator and applied in a non-discriminatory manner. Those charges shall not be distance-related.
(...)
Article 5
Provision of information on interconnection capacities
1. Transmission system operators shall put in place coordination and information exchange mechanisms to ensure the
security of the networks in the context of congestion management.
2. The safety, operational and planning standards used by transmission system operators shall be made public. The
information published shall include a general scheme for the calculation of the total transfer capacity and the transmission
reliability margin based upon the electrical and physical features of the network. Such schemes shall be subject to the
approval of the regulatory authorities.
3. Transmission system operators shall publish estimates of available transfer capacity for each day, indicating any
available transfer capacity already reserved. These publications shall be made at specified intervals before the day of
transport and shall include, in any case, week-ahead and month-ahead estimates, as well as a quantitative indication of
the expected reliability of the available capacity.
(...)
Article 6
General principles of congestion management
1. Network congestion problems shall be addressed with non-discriminatory market based solutions which give efficient
economic signals to the market participants and transmission system operators involved. Network congestion problems
shall preferentially be solved with non transaction based methods, i.e. methods that do not involve a selection between the
contracts of individual market participants.
(...)
5. Transmission system operators shall, as far as technically possible, net the capacity requirements of any power flows in
opposite direction over the congested interconnection line in order to use this line to its maximum capacity. Having full
regard to network security, transactions that relieve the congestion shall never be denied.
19
In spite of the second energy package, the functioning of the Internal Energy Market was not yet
satisfactory; substantial widespread price increases, persistent price differentials among
neighbouring geographical regions and blackouts in some areas, particularly dramatic in 2003,
convinced consumers and the European Commission that new initiatives were necessary. The
Competition Directorate-General launched an extensive “sector inquiry” in 2005 and identified four
major deficiencies 13 requiring the adoption of structural measures. In September 2007 the European
Commission presented a set of new legislative proposals – the so-called “third energy package” -
that was adopted in 2009, following substantial amendments by the Council and by the Parliament.
In the meantime, national and regional (supra-national) wholesale electricity markets were set up.
Because EU legislation never attempted to provide a blueprint for the design of wholesale energy
markets, different models were implemented, creating potential and actual barriers to cross-border
electricity trade. Later on, step-by-step the harmonisation of market rules and increased market-to-
market coordination through “market coupling” procedures, based on voluntary cooperation among
several stakeholders, including TSOs, and being bound with the CACM, has prevented the drift of
such heteromorphic markets.
Although the third electricity package introduced some provisions aimed at improving the
coordination of planning and the expansion of transmission networks throughout Europe, namely
assigning to ENTSO-E - as a new European entity - the responsibility to deliver a biennial Ten-Year
Network Development Plan (TYNDP), interconnection capacity at several borders was, and still is,
scarce. It was acknowledged that one of the main reasons for this situation was the duration of the
permitting process; on average ten years are necessary to build a new transmission line, of which
only two to three years are used for the works. Therefore, in 2011 the Commission proposed a new
infrastructure Regulation that was adopted in 2013 14 , laying down “guidelines for the timely
development and interoperability of priority corridors and areas of trans-European energy
infrastructure”. This Regulation was part of a package on trans-European infrastructure
encompassing energy, transport and digital networks and including a €50 billion Connecting Europe
Facility (CEF) to leverage priority investments.
Several factors prevented the Internal Energy Market from becoming an accomplished reality until
now, namely:
13 “(1) achieving effective unbundling of network and supply activities, (2) removing the regulatory gaps (in particular for cross border
issues), (3) addressing market concentration and barriers to entry, and (4) increasing transparency in market operations” - COM(2006)
851 final of 10.1.2007
14 Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy
infrastructure and repealing Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No
715/2009. O.J. L 115 of 25.04.2013
20
- Lack of physical cross-border infrastructure at several borders (obviously a necessary,
although not sufficient condition for the development of integrated markets based upon
physical networks, such as electricity).
- Lack of a single European market model – conceived either as the top-down implementation
of a centralised single design or as the bottom-up construction of a hierarchical organisation
of compatible market structures.
- Lack of a multi-divisional organisation able to optimise the system operation at European
level (in spite of an increasing number of related rules in Network Codes and in spite of
several regional efforts and projects, coordination of the system operation at European level
cannot yet be considered to be fully optimised).
- Lack of effective regulation at EU level through an independent, energy specific regulatory
authority.
The European institutions keep their faith on the possibility of accomplishing the Internal Energy
Market in a brief period of time and remain committed to the “single energy market” venture. Political
statements frequently reaffirm this commitment, monitoring reports are regularly published, some
anti-trust cases have been carried out and the Competition Directorate-General in many
15
circumstances has imposed severe remedies , regulators continue to promote the
“Europeanisation” of energy markets, et cetera. However, in the meantime, new European public
policies (as the ones known as “20-20-20 in 2020”) “require a revolution in energy systems”16. With
different speeds and different degrees of engagement across Europe, electricity systems and
electricity markets started the transition towards a low-carbon landscape. This means that to be
efficient both vis-à-vis the market operation and the policy targets the Internal Electricity Market that
one day may be achieved will be very different from the initial “Single Market” project launched a
quarter century ago.
1.1.2 The European legal framework
The Treaty on the Functioning of the EU (Treaty of Lisbon) came into force on 1 December 2009
and includes, for the first time in the history of European Treaties, a specific energy chapter (Article
194). Establishing and ensuring the proper functioning of the internal energy market are now the
explicit responsibilities of the EU, although Member States have the “right to determine the
conditions for exploiting its energy resources, its choice between different energy sources and the
general structure of its energy supply”.
15 See list of cases in http://ec.europa.eu/competition/sectors/energy/electricity/electricity_en.html

16 European Council conclusions, 4 February 2011
21
Box 4: Energy in the Treaty on the Functioning of the European Union
TITLE XXI
ENERGY
Article 194
1. In the context of the establishment and functioning of the internal market and with regard for the need to preserve and
improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to:
(a) ensure the functioning of the energy market;
(b) ensure security of energy supply in the Union;
(c) promote energy efficiency and energy saving and the development of new and renewable forms of energy; and
(d) promote the interconnection of energy networks.
2. Without prejudice to the application of other provisions of the Treaties, the European Parliament and the Council, acting
in accordance with the ordinary legislative procedure, shall establish the measures necessary to achieve the objectives in
paragraph 1. Such measures shall be adopted after consultation of the Economic and Social Committee and the
Committee of the Regions.
Such measures shall not affect a Member State's right to determine the conditions for exploiting its energy resources, its
choice between different energy sources and the general structure of its energy supply, without prejudice to Article
192(2)(c).
3. By way of derogation from paragraph 2, the Council, acting in accordance with a special legislative procedure, shall
unanimously and after consulting the European Parliament, establish the measures referred to therein when they are
primarily of a fiscal nature.
Besides the Treaty, the so-called 2009 “third energy package” defines the current legal framework
for the energy industry in Europe. The definitions presented in the following box (most of them first
introduced in 2003) are the most relevant for the purpose of the present report:
22
Box 5: Definitions provided by current EU legislation17
Article 2
Definitions
For the purposes of this Directive, the following definitions apply:
3. ‘transmission’ means the transport of electricity on the extra high-voltage and high-voltage interconnected system with a view to its
delivery to final customers or to distributors, but does not include supply;
4. ‘transmission system operator’ means a natural or legal person responsible for operating, ensuring the maintenance of and, if
necessary, developing the transmission system in a given area and, where applicable, its interconnections with other systems, and for
ensuring the long-term ability of the system to meet reasonable demands for the transmission of electricity;
5. ‘distribution’ means the transport of electricity on high-voltage, medium-voltage and low-voltage distribution systems with a view to its
delivery to customers, but does not include supply;
6. ‘distribution system operator’ means a natural or legal person responsible for operating, ensuring the maintenance of and, if necessary,
developing the distribution system in a given area and, where applicable, its interconnections with other systems and for ensuring the
long-term ability of the system to meet reasonable demands for the distribution of electricity;
(...)
13. ‘interconnector’ means equipment used to link electricity systems;
14. ‘interconnected system’ means a number of transmission and distribution systems linked together by means of one or more
interconnectors;
(...)
17. ‘ancillary service’ means a service necessary for the operation of a transmission or distribution system;
18. ‘system user’ means a natural or legal person supplying to, or being supplied by, a transmission or distribution system;
(...)
26. ‘small isolated system’ means any system with consumption of less than 3 000 GWh in the year 1996, where less than 5 % of annual
consumption is obtained through interconnection with other systems;
27. ‘micro isolated system’ means any system with consumption less than 500 GWh in the year 1996, where there is no connection with
other systems;
(...)
29. ‘energy efficiency/demand-side management’ means a global or integrated approach aimed at influencing the amount and timing of
electricity consumption in order to reduce primary energy consumption and peak loads by giving precedence to investments in energy
efficiency measures, or other measures, such as interruptible supply contracts, over investments to increase generation capacity, if the
former are the most effective and economical option, taking into account the positive environmental impact of reduced energy
consumption and the security of supply and distribution cost aspects related to it;
30. ‘renewable energy sources’ means renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass,
landfill gas, sewage treatment plant gas and biogases);
31. ‘distributed generation’ means generation plants connected to the distribution system;
17 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market
in electricity and repealing Directive 2003/54/EC. O.J. L 211 of 14.8.2009
23
The definition of the tasks and the duties of transmission system operators is much more detailed
under the “third energy package” as compared to 1996 and 2003, as can be seen in Boxes 6 and 7
on pages 27 and 28, respectively. Moreover, other provisions of Directive 2009/72/EC have
substantial organizational (although not much functional) impact upon individual TSOs, namely
Chapter V (Independent Transmission Operator) and the following articles from Chapter IV:
- Article 6 - “Promotion of regional cooperation”;

- Article 9 - “Unbundling of transmission systems and transmission system operators”;
- Article 10 - “Designation and certification of transmission system operators”;
- Article 11 - “Certification in relation to third countries”;
- Article 13 - “Independent system operator”;
- Article 14 - “Unbundling of transmission system owners”;
- Article 16 - “Confidentiality for transmission system operators and transmission system
owners”
24
Article 12
Tasks of transmission system operators
Each transmission system operator shall be responsible for:
(a) ensuring the long-term ability of the system to meet reasonable demands for the transmission of electricity, operating,
maintaining and developing under economic conditions secure, reliable and efficient transmission systems with due regard
to the environment;
(b) ensuring adequate means to meet service obligations;
(c) contributing to security of supply through adequate transmission capacity and system reliability;
(d) managing electricity flows on the system, taking into account exchanges with other interconnected systems. To that
end, the transmission system operator shall be responsible for ensuring a secure, reliable and efficient electricity system
and, in that context, for ensuring the availability of all necessary ancillary services, including those provided by demand
response, insofar as such availability is independent from any other transmission system with which its system is
interconnected;
(e) providing to the operator of any other system with which its system is interconnected sufficient information to ensure
the secure and efficient operation, coordinated development and interoperability of the interconnected system;
(f) ensuring non-discrimination as between system users or classes of system users, particularly in favour of its related
undertakings;
(g) providing system users with the information they need for efficient access to the system; and
(h) collecting congestion rents and payments under the inter-transmission system operator compensation mechanism, in
compliance with Article 13 of Regulation (EC) No 714/2009, granting and managing third-party access and giving
reasoned explanations when it denies such access, which shall be monitored by the national regulatory authorities; in
carrying out their tasks under this Article transmission system operators shall primarily facilitate market integration.
25
Article 15
Dispatching and balancing
1. Without prejudice to the supply of electricity on the basis of contractual obligations, including those which derive from
the tendering specifications, the transmission system operator shall, where it has such a function, be responsible for
dispatching the generating installations in its area and for determining the use of interconnectors with other systems.
2. The dispatching of generating installations and the use of interconnectors shall be determined on the basis of criteria
which shall be approved by national regulatory authorities where competent and which must be objective, published and
applied in a non-discriminatory manner, ensuring the proper functioning of the internal market in electricity. The criteria
shall take into account the economic precedence of electricity from available generating installations or interconnector
transfers and the technical constraints on the system.
3. A Member State shall require system operators to act in accordance with Article 16 of Directive 2009/28/EC when
dispatching generating installations using renewable energy sources. They also may require the system operator to give
priority when dispatching generating installations producing combined heat and power.
4. A Member State may, for reasons of security of supply, direct that priority be given to the dispatch of generating
installations using indigenous primary energy fuel sources, to an extent not exceeding, in any calendar year, 15 % of the
overall primary energy necessary to produce the electricity consumed in the Member State concerned.
5. The regulatory authorities where Member States have so provided or Member States shall require transmission
system operators to comply with minimum standards for the maintenance and development of the transmission system,
including interconnection capacity.
6. Transmission system operators shall procure the energy they use to cover energy losses and reserve capacity in their
system according to transparent, non-discriminatory and market-based procedures, whenever they have such a function.
7. Rules adopted by transmission system operators for balancing the electricity system shall be objective, transparent
and non-discriminatory, including rules for charging system users of their networks for energy imbalance. The terms and
conditions, including the rules and tariffs, for the provision of such services by transmission system operators shall be
established pursuant to a methodology compatible with Article 37(6) in a non-discriminatory and cost-reflective way and
shall be published.
18
As mentioned above, the third electricity package, in particular the 2009 Regulation ,
institutionalised the collective action of TSOs by establishing a European entity named “European
Network of Transmission System Operators for Electricity” (the ENTSO for Electricity). “In order
to ensure optimal management of the electricity transmission network and to allow trading and
18 Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network
for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003. O.J. L 211 of 14.8.2009
26
supplying electricity across borders in the Community”. The Regulation also defines the statutory
tasks of the ENTSO for Electricity in some detail - see Box 8.
Box 8: Collective EU transmission system operation in the 2009 Regulation
Article 8
Tasks of the ENTSO for Electricity
1. The ENTSO for Electricity shall elaborate network codes in the areas referred to in paragraph 6 of this Article upon a request
addressed to it by the Commission in accordance with Article 6(6).
2. The ENTSO for Electricity may elaborate network codes in the areas set out in paragraph 6 with a view to achieving the objectives set
out in Article 4 where those network codes do not relate to areas covered by a request addressed to it by the Commission. Those network
codes shall be submitted to the Agency for an opinion. That opinion shall be duly taken into account by the ENTSO for Electricity.
3. The ENTSO for Electricity shall adopt:
(a) common network operation tools to ensure coordination of network operation in normal and emergency conditions, including a
common incidents classification scale, and research plans;
(b) a non-binding Community-wide ten-year network development plan, (Community-wide network development plan), including a
European generation adequacy outlook, every two years;
(c) recommendations relating to the coordination of technical cooperation between Community and third-country transmission system
operators;
(d) an annual work programme;
(e) an annual report;
(f) annual summer and winter generation adequacy outlooks.
4. The European generation adequacy outlook referred to in point (b) of paragraph 3 shall cover the overall adequacy of the electricity
system to supply current and projected demands for electricity for the next five-year period as well as for the period between five and 15
years from the date of that outlook. The European generation adequacy outlook shall build on national generation adequacy outlooks
prepared by each individual transmission system operator.
5. The annual work programme referred to in point (d) of paragraph 3 shall contain a list and description of the network codes to be
prepared, a plan on coordination of operation of the network, and research and development activities, to be realised in that year, and an
indicative calendar.
6. The network codes referred to in paragraphs 1 and 2 shall cover the following areas, taking into account, if appropriate, regional
specificities:
(a) network security and reliability rules including rules for technical transmission reserve capacity for operational network security;
(b) network connection rules;
(c) third-party access rules;
(d) data exchange and settlement rules;
(e) interoperability rules;
(f) operational procedures in an emergency;
(g) capacity-allocation and congestion-management rules;
(h) rules for trading related to technical and operational provision of network access services and system balancing;
(i) transparency rules;
(j) balancing rules including network-related reserve power rules;
27
(k) rules regarding harmonised transmission tariff structures including locational signals and inter-transmission system operator
compensation rules; and
(l) energy efficiency regarding electricity networks.
7. The network codes shall be developed for cross-border network issues and market integration issues and shall be without prejudice to
the Member States’ right to establish national network codes which do not affect cross-border trade.
8. The ENTSO for Electricity shall monitor and analyse the implementation of the network codes and the Guidelines adopted by the
Commission in accordance with Article 6(11), and their effect on the harmonisation of applicable rules aimed at facilitating market
integration. The ENTSO for Electricity shall report its findings to the Agency and shall include the results of the analysis in the annual
report referred to in point (e) of paragraph 3 of this Article.
9. The ENTSO for Electricity shall make available all information required by the Agency to fulfil its tasks under Article 9(1).
10. The ENTSO for Electricity shall adopt and publish a Community-wide network development plan every two years. The Community-
wide network development plan shall include the modelling of the integrated network, scenario development, a European generation
adequacy outlook and an assessment of the resilience of the system.
The Community-wide network development plan shall, in particular:
(a) build on national investment plans, taking into account regional investment plans as referred to in Article 12(1), and, if appropriate,
Community aspects of network planning including the guidelines for trans-European energy networks in accordance with Decision No
1364/2006/EC of the European Parliament and of the Council (9);
(b) regarding cross-border interconnections, also build on the reasonable needs of different system users and integrate long-term
commitments from investors referred to in Article 8 and Articles 13 and 22 of Directive 2009/72/EC; and
(c) identify investment gaps, notably with respect to cross-border capacities.
In regard to point (c) of the second subparagraph, a review of barriers to the increase of cross-border capacity of the network arising from
different approval procedures or practices may be annexed to the Community-wide network development plan.
11. The Agency shall provide an opinion on the national ten-year network development plans to assess their consistency with the
Community-wide network development plan. If the Agency identifies inconsistencies between a national ten-year network development
plan and the Community-wide network development plan, it shall recommend amending the national ten-year network development plan
or the Community-wide network development plan as appropriate. If such national ten-year network development plan is elaborated in
accordance with Article 22 of Directive 2009/72/EC, the Agency shall recommend that the competent national regulatory authority amend
the national ten-year network development plan in accordance with Article 22(7) of that Directive and inform the Commission thereof.
12. Upon request of the Commission, the ENTSO for Electricity shall give its views to the Commission on the adoption of the Guidelines
as laid down in Article 18.
As mentioned earlier, since 1996 EU legislation has foreseen the establishment of a single electricity
market where electricity sellers and buyers (generators, suppliers, traders, end-users, etc.) have the
right to enter into bilateral or multilateral trading arrangements independent of the Member States
where they are located, as long as those transactions are compatible with the legitimate interests of
other market agents and comply with applicable market and operational rules. Handling the
requests of a very large array of market players, in order to enable the development of well-
functioning European wholesale and retail markets while fulfilling several reliability criteria, is a
challenging task, especially given the geographical scale and the potential volume involved.
28
EU legislation assigns to TSOs the obligation to facilitate electricity trade, including cross-border
trade, while ensuring appropriate reliability and security standards. However, until recently EU
legislation did not specify how TSOs should coordinate their activities in order to ensure an effective
network operation at European level. Regulation (EU) No 347/2013 of the European Parliament and
of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing
Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and
(EC) No 715/2009 19 , amending Regulation (EC) No 714/2009, at last provided some concrete
guidance, as shown in Box 9.
Box 9: Specification of TSO obligations at EU level
Article 21
Amendments to Regulation (EC) No 714/2009
Regulation (EC) No 714/2009 is hereby amended as follows:
(1) Article 8 is amended as follows:
(a) in paragraph 3, point (a) is replaced by the following:
‘(a) common network operation tools to ensure coordination of network operation in normal and emergency conditions,
including a common incident classification scale, and research plans. These tools shall specify inter alia:
(i) the information, including appropriate day ahead, intra-day and real-time information, useful for improving operational
coordination, as well as the optimal frequency for the collection and sharing of such information;
(ii) the technological platform for the exchange of information in real time and where appropriate, the technological
platforms for the collection, processing and transmission of the other information referred to in point (i), as well as for the
implementation of the procedures capable of increasing operational coordination between transmission system operators
with a view to such coordination becoming Union-wide;
(iii) how transmission system operators make available the operational information to other transmission system operators
or any entity duly mandated to support them to achieve operational coordination, and to the Agency; and
(iv) that transmission system operators designate a contact point in charge of answering inquiries from other transmission
system operators or from any entity duly mandated as referred to in point (iii), or from the Agency concerning such
information.
The ENTSO for Electricity shall submit the adopted specifications on points (i) to (iv) above to the Agency and to the
Commission by 16 May 2015.
Within 12 months of the adoption of the specifications, the Agency shall issue an opinion in which it considers whether
they sufficiently contribute to the promotion of cross-border trade and to ensuring the optimal management, coordinated
operation, efficient use and sound technical evolution of the European electricity transmission network.’;
19 O.J. L 115/39 of 25.04.2013
29
Besides the Treaty and the two above mentioned 2009 documents - Directive 2009/72/EC and
Regulation (EC) No 714/2009 - the energy industry legal framework consists of many more pieces of
legislation. The official site of the Directorate-General for Energy (DG ENER) lists 13 for electricity
alone, as of 19 December 2014 20 . The following Box recalls the main types of EU secondary
legislation (the primary legislation being the Treaties)21.
Box 10: Basic types of EU secondary legislation 22
There are three basic types of EU legislation: regulations, directives and decisions.
A regulation is similar to a national law with the difference that it is applicable in all EU countries.
Directives set out general rules to be transferred into national law by each country as they deem appropriate.
A decision only deals with a particular issue and specifically mentioned persons or organisations.
Regulation (EC) No 714/2009 foresees other types of documents, namely “Guidelines” and “Network
Codes”23. A Guideline is approved by the Commission on its own and published as “Commission
Regulation” (the other type of regulation, like Regulation (EC) No 714/2009, is called “Regulation of
the European Parliament and of the Council”). A Network Code must be approved through the
“Committee procedure” 24 , which means a Committee of representatives of the Member States
chaired by the representative of the Commission and voting with a qualified majority. Fig. 1
describes different types of EU legislation governing the electricity sector in Europe at present, while
Fig. 2 depicts the typical national framework in each Member State.
At EU level there is no energy regulator: no independent body “making regulation”. In the EU, there
are “regulations” issued by the Council and Parliament or by the Commission and there are
decisions of a regulatory nature taken by non-legislators - either the European Commission or
special Committees. Usually at national level, regulation means rules and decisions taken by the
20 https://ec.europa.eu/energy/sites/ener/files/documents/2014-12-19-ener-legislation.pdf
21 There are two more types of unilateral acts foreseen in Article 288 of the Treaty: opinions and recommendations; unlike regulations,
directives and decisions, these two have no binding force. Furthermore, the Commission also issues “atypical” acts such as
communications and recommendations.
22 http://ec.europa.eu/legislation/index_en.htm
23 Article 290 of the Treaty establishes that “A legislative act may delegate to the Commission the power to adopt non-legislative acts of
general application to supplement or amend certain non-essential elements of the legislative act.”
24 For a full description of the Committee Procedures (“Comitology”) see Council Decision of 17 July 2006 amending Decision
1999/468/EC laying down the procedures for the exercise of implementing powers conferred on the Commission. O.J. L 200 of 22.7.2006
30
designated national regulatory authority. In the next Section, the existing EU “regulatory rules” are
briefly described.
PRIMARY Treaty
LEGISLATION (Art. 194)
SECONDARY Regulation Directive

other
LEGISLATION (EC) 714/2009 2009/72/EC
Network
"REGULATION" Guidelines
Codes
Fig. 1: The EU legal framework – electricity
PRIMARY
Constitution
LEGISLATION
Act establishing
SECONDARY other national Transposition of EU
National Regulatory
legislation Directives
LEGISLATION Authority
REGULATION National Codes other regulation
Fig. 2: The typical national legal framework - electricity
1.1.3 The European “regulatory” framework
As described in the previous Section, at EU level there is a complex legal framework, including legal
acts called “regulations”, but there is no regulatory framework as such, which would be developed by
an independent EU regulator, similar to the national regulatory frameworks established by
31
independent national regulators. This “regulatory gap” between national and EU levels was identified
many years ago as a major obstacle to the proper functioning of the internal energy market 25, and it
has not yet been overcome.
What we use to call the European “regulatory” framework is mainly a set of guidelines and network
codes that have been developed since the third energy package came into force. The number and
the intrinsic complexity of these documents is growing rapidly. It sometimes makes it difficult for
newcomers to understand the actual functioning of the internal energy market at the EU level.
Fig. 3 describes the process leading to the approval of Network Codes.
Fig. 3: Development process of Network Codes 26
Fig. 4 indicates all Network Codes currently under development, while Fig. 5 shows the status of
their respective developments. Table 1 provides a brief overview of each Network Code.
25 Cf. Vasconcelos, J. (2001) “Regulation of energy markets and European governance - discussion paper” CEER
26 FWGL means framework guidelines and NC means network codes.
32
Fig. 4: Overview of Network Codes under development
33
Fig. 5: Network Codes development status (July 2015) 27
27 https://www.entsoe.eu/major-projects/network-code-development/updates-milestones/Pages/default.aspx
34
Network Code Timeframe Specifications
Adopted in  Size-dependent, technical requirements for Power Generating Modules

Requirements
Comitology  Common framework of obligations for Network Operators to appropriately make
for Generators
Process (2015) use of the Power Generating Facilities’ capabilities
 European rules on how demand interacts with the transmission system

Comitology  Ensure effective contribution to the stability of the power system by all distribution
Demand
Process (entered networks and demand facilities
Connection
2014)  Clarify the role that demand response will play in contributing to the deployment
of RES
ACER Manage HVDC lines and connections:

HVDC
recommendation  Determine contribution to system security
Connection
submitted (2014)  Promote coordinated development of the infrastructure
Framework for maintaining a secure interconnected European electricity transmission

ACER system: common, legally binding principles and rules for operating electricity
Operational
recommendation transmission networks
Security
submitted (2013)  Operational Security requirements and principles; Data exchange; provisions for
training of System Operator Employees
Common time horizons, methodologies and principles allowing to carry out

Operational ACER
coordinated Operational Security Analysis and Adequacy analysis to maintain
Planning & recommendation
Operational Security and support the efficient functioning of the European internal
Scheduling submitted (2013)
electricity market
Load
ACER  Formalised harmonised system frequency quality targets
Frequency
recommendation  Objective and harmonised requirements regarding Load-Frequency-Control (LFC)
Control &
submitted (2013) and Reserves
Reserves
Recommended for
Emergency & Procedures and remedial actions to be applied in the Emergency, Blackout and
28 adoption by ACER
Restoration Restoration states
(2015)
Rules that will introduce an EU Target Model: single approach to cross-border

Capacity
electricity trading
Allocation & Entered into force
 for cross-border capacity allocation in day-ahead and intraday timescales.
Congestion (2015)
Outlines the way in which capacity will be calculated across the different zones
Management
 for congestion management
Forward Comitology
Design and operation of the markets in which the right to use cross-border capacity is
Capacity Process (entered
sold in advance
Allocation 2015)
Recommended for
Electricity Steps for transforming balancing markets to a set of regional markets and later a pan-
adoption by ACER
Balancing European market
(2015)
Table 1: Main contents of current electricity Network Codes
28
Operational codes (OS, OPS, LFC&R) were merged and are about to enter comitology.
35
Despite the fact that several national markets are increasingly converging and that the European
regulatory framework is increasingly driving this harmonisation process, there are still different
national initiatives taking place. Perhaps the most telling example is capacity markets, a solution for
rewarding generators for their potential capability to produce electricity (their installed generation
capacity), in addition to the flows of energy that they actually generate and sell in the market.
An inefficient and uncoordinated way of implementing capacity markets could aggravate existing EU
market inefficiencies and hold back the implementation of urgent EU market reforms. Figure 15
shows the diversity of capacity remuneration mechanisms (CRM) in Europe as of June 2014.
Fig. 6: Implementation of CRM across Europe. Source: Eurelectric, 2014
Reacting to this, on April 29, 2015, the European Commission launched a sector inquiry into
capacity mechanisms as potential disruptions of EU markets. Commissioner for Competition
Margrethe Vestager, said: "This sector inquiry sends a clear signal to Member States to respect EU
36
state aid rules when implementing capacity mechanisms, and contributes to the Commission's goal
to build a true Energy Union in Europe." 29
1.1.4 The functions of European TSOs today
The TSOs perform different tasks to fulfil their duties and manage the power system. The co-
existence of different tasks is better presented in a TSO modular analysis framework similar to the
one presented in Rious et al. (2008). These TSO functions can be classified as either hardware or
software functions. The “Hardware” functions relate to the management of the assets of the network,
implying investment in and maintenance of the network; including the connection of grid users. The
“Software” functions relate to the operation of the grid and the system, which covers the system
operation, the facilitation of the market operation at the interfaces with other agents.
Hardware function 1 - Network maintenance and expansion
Transmission planning is the process that evaluates potential investments and maintenance plans in
the network. New transmission assets are evaluated in the investment plan determining when,
where and how much capacity should be added, assets be maintained or upgraded, along with other
technical characteristics of the assets. Scheduling of line outages and other tasks necessary to
maintain network operation under some adequate reliability levels are evaluated in the maintenance
plans (Pérez-Arriaga, 2013).
Transmission planning is not only necessary at national level (as the Intra-TSO network upgrade
investments do), but also for interconnecting different national systems (as an Inter-TSO network
upgrade investment has to do). A full separation of these two kinds of planning (internal and cross-
border) can only result in inefficiencies because, on the one hand, investments needed to solve
problems within one TSO control zone do not necessarily favour trade between TSO zones and, on
the other hand, cross-border investments can result in inefficiencies in the internal grid which have to
be solved in order to get the full potential of the cross-border investment.
Furthermore, power generation and transmission are complementary activities that must be
coordinated to ensure the optimal use and development of the transmission grid (e.g., a new line can
be a substitute to a new plant; and vice-versa). Before liberalisation and the unbundling of
generation and transmission activities, a single vertically integrated utility planned the joint
expansion of generation and transmission. It is now more difficult to plan a system expansion
because generation and transmission activities are independent, and several different actors take
29 http://europa.eu/rapid/press-release_IP-15-4891_en.htm
37
independent, uncoordinated decisions. Different regulatory approaches have been proposed to solve
this power network problem (Pérez-Arriaga and Olmos, 2007):
1. Supervised centralised planning and regulated remuneration: Planning is made by a

specialist agent (the “system operator”), and the transmission network owner is responsible
for expansion proposals. In this case, the remuneration is based on the actual grid
infrastructure. New facilities are included in the regulated asset base and remunerated at a
specific rate of return.
2. Traditional regulated monopoly: The transmission company is responsible for making

investment decisions, and remuneration is based on an efficient grid design and operating
cost criteria using an incentive-based monopoly regulation, such as a revenue cap or price
cap regulation.
3. Market player initiative with regulatory supervision: It is the grid users who propose network
reinforcements, taking into consideration the benefits they expect to receive. The regulatory
agency evaluates the proposals using pre-established criteria and organises a tender for
building and maintenance. The transmission company that wins the tender is remunerated
according to its bid, and the operation is left to the system operator.
4. Merchant lines: It is the merchant investors who develop the network and use it or collect the
congestion rents or other revenue borne on their lines.
Another important issue in transmission planning is the time lag between investment horizons for
generation and for the network; this may create significant uncertainty when planning the network.
New generation units’ connection may create congestions in the system before the TSO can
upgrade the grid. In order to solve this problem, the TSO may anticipate the connection of new users
and plan the network investments to avoid congestion. This allows the TSO to deal with the time lag
between the building times of new generation units and the time necessary to upgrade the network.
However, this anticipation strategy is only efficient when the time differences are significant and the
cost of anticipation and errors is moderate (Rious et al., 2011).
Hardware function 2 - Connection of grid users
TSOs must guarantee non-discriminatory and transparent access to the network for all grid users
(generation plants, loads, etc.). However the physical constraints of the network may impose
restrictions to the connection of users, and therefore it may be necessary for the TSO to expand the
network or to refuse access. This asks for clear and objective rules to authorise network
38
connections, as well as predetermined criteria to refuse access. At European level, these rules are
being proposed by ENTSO-E in the codes of network connection (Section 1.1.3).
It is frequent that short-term signals are complemented with long-term tariffs known as transmission
charges. These transmission charges send other economic signals to users, to encourage them to
reduce the costs of network expansion. This can be achieved if the allocation of transmission costs
rely on some basic principles as explained by Pérez-Arriaga (2013):
1. The “Beneficiary pays” principle: the transmission cost should be divided among users in
proportion to their aggregate economic benefits. Thus, both generators and loads should pay
because both benefit from the network expansion.
2. Transmission charges should not be based on individual commercial transactions:

transmission charges should depend on objective grid related characteristics, such as the
location of the users of the network and the aggregated temporal patterns of power injection
(for generators) and power withdrawal (for loads). Transmission charges should not depend
on individual commercial transactions between users. If this principle is not met, it may result
in “pancaking”, a situation in which users must pay cumulative tariffs for each region where
power is expected to pass in the contract between buyer and seller, regardless of actual
power flows. In fact, individual commercial transactions cannot be tracked in physical flows of
electricity due to the superposition of flows resulting from the various injections and
withdraws.
3. Transmission charges should be established ex ante: Transmission charges for new users
should be established ex ante and not be updated for a reasonable time. Thus, predictable
economic signals are sent to investors in order to choose the most suitable sites with low
financial risks.
4. The format of the transmission charges matters: The format of the transmission charges has
implications for the market behavior of agents. The level of distortions of the economic
dispatch is not the same if connection transmission charges are structured as lump sums (€),
or if volumetric charges (€/MWh) or capacity charges (€/MW) are applied instead.
Transmission charges can therefore be divided into connection charges and Use of the System
(UoS) charges. Connection charges can be shallow charges or heavy charges. With the shallow
charges, new users are only charged for a small portion of the fixed costs of the network. This
portion only covers the cost of the infrastructure required to connect the new user. The costs of any
other reinforcement in the network are socialised. Heavy charges cover the cost of both the direct
connection infrastructure and the necessary network reinforcements. Thus, new users are charged
the total cost of all new connection infrastructures.
39
Software function 1 - System operation
Electricity systems consist of generation plants, transmission and distribution networks, and loads.
The transmission network is necessary to transmit the electricity from generation plants to
consumption centers. The distribution networks carry the electricity to users of smaller size that are
not connected to the transmission grid. Any disturbance in the system may compromise the overall
reliability as well as the supply and balance of electricity. For this reason, a global operation of the
system is necessary, which comprises measures required to ensure the reliability and continuity of
supply, as well as coordination between the transmission and generation to keep the energy flowing
to the load under certain quality conditions. In the EU, TSOs are responsible for the power system
operation, taking into account externalities such as grid congestions or imbalances between
generators and consumers, as explained below.
Balancing generation and demand
To keep energy flows flowing, power systems require a permanent equilibrium between generation
and consumption. Even small deviations from the equilibrium (“imbalances”) affect a key parameter -
the operating frequency of the system. Keeping this balance between generation and demand is a
complex task because, to this day, there is no affordable massive electricity storage - which implies
that actual coordination between generation and demand can only be fully assessed near the real-
time operation of the system.
The primary structural consequence is that this real time power balance management is not
performed by the wholesale market on its own (as a decentralised decision process), but by a
“central authority” responsible for the security of the system (as does “air control” for air
transportation). While this balancing task is administered by the TSO, it is also a key and essential
component of the market itself (market design and market sequencing), which hence go far beyond
the mission played within the proper transmission area (Glachant and Saguan, 2006). The TSOs are
“market facilitators”. Power markets cannot work without the TSOs dedication to the markets.
In general terms, the balancing tools (being markets or other mechanisms) allow the TSOs to
guarantee the feasibility of all operations of power injection (generation) and power withdrawal
(consumption) from several minutes or hours before the real-time operation to its actual
implementation in real-time. The main difference between “real-time markets” and “balancing
mechanisms” is that real-time markets use the market clearing price to determine the beneficiaries
and the value of electricity in real time, while balancing mechanisms impose a unilateral penalty to
the imbalances. The imbalance costs are incorporated into the prices of the observed volume gap
40
between the power contracted previous to real-time (especially in day-ahead and intraday markets)
and the actual volume of power being consumed and generated.
The way balancing services are provided, managed and charged to users has changed over time;
the more sophisticated electricity markets become and the more intermittent generation is added to
the system, the more balancing services play a crucial role. The role of TSOs in managing ancillary
services in general and balancing services in particular has also changed substantially since
liberalisation started.
Congestion management
The power flows in most of the transmission lines cannot be steered through any contractual path.
They obey Kirchhoff’s laws of physics and depend on the impedance of the lines as well as on the
injections and withdrawals of power at the different network nodes. A congestion occurs when the
network security constraints (mainly caused by the thermal limits of the lines) cannot be violated,
making it impossible to deliver the desired amount of energy for grid users from one node to another.
Different mechanisms can be used to clear the congestion. The choice of a particular mechanism
depends on the market design and the system size, i.e., it is highly dependent on regulatory models,
and may undergo significant changes in a short time period.
Theoretically, the most efficient way to determine short-term electricity prices is the nodal-pricing
system (Green, 2007; Neuhoff et al., 2011). In this setting, the electricity market explicitly takes the
actual operational constraints imposed by the power network into account and remunerates the
corresponding actual costs of producing and transporting energy through the different nodes - which
may lead to different electricity prices in each node of the system (Schweppe et al., 1988).
Another congestion management mechanism is redispatching. In this setting, the actual constraints
of the electricity network are not taken into account in the daily wholesale electricity market-clearing
process. One assumes that all energy is traded on a single “reference node”, and therefore that the
electricity price is the same for all nodes in the system. This setting may be suitable when the
transmission network is sufficiently robust and when there are no structural constraints to repeatedly
cause significant congestion in the system. When some congestion arises, the redispatch of some
generation units is necessary to perform the system adjustments in order to clear the congestion.
Thus, only the redispatched generation units are involved in the adaptation to the grid constraints.
They are the only ones to receive direct economic signals on the existence of transmission
constraints in the implementation of the market equilibrium.
In addition to the nodal-pricing system and the redispatch mechanism, congestion at

interconnections between multiple power systems might use explicit and implicit auctions (Pérez-
Arriaga and Olmos, 2005). In the explicit auctions, the interconnection capacity is allocated
independent of the energy markets outcomes. In this setting, first the transmission capacity in the
41
interconnection is allocated, and it is only in a second phase that the generation volume and the
prices of the interconnected electricity markets are determined. In the “implicit” setting, the
interconnection capacity is allocated according to the merit order of energy bids made by buyers and
generation companies.
When systems are interconnected radially, a “market splitting” mechanism can clear congestion by
establishing different prices in the sub bidding areas of the same market administered by a single
market operator. The electricity market price is the same for all the sub-areas only when there is no
congestion on the interconnections. There are different sub-area prices in the event of congestion.
Another mechanism known as “market coupling” is used when the adjacent markets and systems
cannot be centrally managed by a single market operator (within a single PX) due to institutional
constraints. Working between several neighbouring PXs, this mechanism allows agents to offer their
energy locally in local exchanges, which are all coordinated with a single common price when no
congestion occurs. At congestion, these PXs are decoupled from each other. Each system operator
is responsible for communicating with the neighbouring system operators to coordinate their grid and
system information. Thus, the congestion on interconnections is cleared through an iterative process
of information exchange, and different electricity prices in the areas are determined.
Software function 2 - Interface with other actors
a) With other TSOs
One of the main objectives of energy policy in Europe is the integration of national electricity
systems into a single EU market. The TSOs in the different Member States must interact and
coordinate their decisions in order to achieve this goal. Coordination between TSOs is necessary in
both the long term for the proper planning of the transmission network expansion and the short term
for a proper system operation.
There are two basic types of coordination, “uniformisation” and “combination” (Rious et al., 2008).
“Uniformisation” involves the harmonisation of the rules. Therefore, the TSOs use the same methods
for the operation and planning of the system and they exchange information about the status of their
systems. “Combination” involves establishing rules that allow for the coexistence of different
individual mechanisms in different zones.
b) With DSOs
The transmission network is designed to balance generation and demand within a large territory in
order to dispatch the most efficient generation, whereas distribution networks have been conceived
to carry electricity to consumers not directly connected to the transmission grid.
42
Under this scheme, TSOs are responsible for managing the transmission network and the system,
and they interact with several market agents. Most Distribution System Operators (DSOs) perform a
more passive kind of system operation, in the sense that they are only responsible for managing
their own networks. Thus, the distribution grids are mainly acting beyond the borders of observability
and the control areas of TSOs, which are, up to now, very often limited to the flows at the boundaries
between both networks. Some degree of interaction and coordination between the TSO and the
DSOs must be found in order to have a better knowledge and control of all system conditions and to
achieve an optimal and efficient system operation.
c) Market facilitation
Although this is not a direct inherent task of TSOs, they are actually responsible for developing the
rules and operating some of the electricity markets, i.e., TSOs are market facilitators. As presented
in the previous Section, ENTSO-E is responsible for developing the network codes to be used in
Europe. These network codes are a set of rules for the connection of users to the grid, the operation
of the network, and the electricity markets. De facto, ENTSO-E is responsible for developing the
rules for cross-border capacity allocation in the short and long-term, congestion management and
the creation of balancing markets. In addition, the TSOs are responsible for managing and operating
these balancing markets in order to ensure an optimal operation of the system.
d) Institutional actors
Besides interacting with other T &D network operators, market operators, transmission network
users and some market agents, TSOs are also required to interact with institutional actors, such as
national regulatory authorities, the European Commission, ACER and several more or less informal
fora.
Most of the functions currently performed by TSOs are described in national and EU legislation, as
well as in national and EU Network Codes. However, some functions are not at all mentioned in any
legislation or are not clearly defined. The following table provides a summary of the functions de
facto performed nowadays by most European TSOs.
43
Security of supply Market facilitator
Long term (> 1 year) System adequacy outlook Year ahead capacity calculation
Grid planning : TYNDP Yearly capacity allocation
(auction office)
Long term security analysis
(1 to 5 years ahead)
Medium term Adequacy assessment Month ahead capacity

(seasonal, monthly) calculation
(> 1 week, <1year)
Grid Security analysis Monthly capacity allocation
(auction office)
Outage planning
(yearly plans, monthly update)
Short term Outage planning (weekly plan, D-2 / D-1 capacity calculation
daily confirmation)
(>1h, < 1 week) Intraday capacity calculation
Grid security analysis (weekly,
Providing parameters to day-
D-2, D-1, intraday)
ahead and intra-day market
Generation/demand balance coupling platforms
assessment
Remedial actions ahead of real
time (changes in generation
schedule)
Real time Continuous Security analysis

(frequency deviation, grid
capacities)
Balancing services activation
Remedial actions activation to
relieve grid constraints (grid
topology, generation schedule
changes)
Post real time BRP positions settlement

Grid access billing
Table 2: Summary of functions currently performed by European TSOs
It should be pointed out that the “traditional”, pre-liberalisation TSO functions have themselves been
considerably extended over the last few years. Here are some examples of such expansion:
 Adequacy assessments evolved from pure network and generation adequacy towards more
general system adequacy (network, generation, voltage/reactive power, inertia, etc.).
Assessments developed from pure national ones towards regional and European wide
assessments.
44
 Stability studies (transient behavior of the system, wide area effects) nowadays include
interconnections with adjacent non-EU systems (e.g. Turkey).
 Analysis of market behavior became a “standard” TSO activity. Analysis of behavior of market
participants and of gaming possibilities is required for improving various products (e.g., auctioning
products, balancing products), for further developing market design and the interface between
market operation and system operation, as well as for performing a meaningful cost-benefit
analysis concerning new transmission projects.
Sometimes, TSOs are active promoters of innovation, for instance introducing new predictive control
strategies, exploring the possibilities of netting balancing needs in real time and introducing new
market clearing algorithms to maximise social welfare.
1.1.5 Voluntary regional cooperation among system operators
The need for enhanced operational coordination among TSOs has been recognised for a long time
and for several reasons, namely:
- improving the overall reliability of the European electricity system;

- enabling the more efficient use of existing interconnections for cross-border trade;
- ensuring system security under the increasing volume of intermittent generation.
The large power disruptions of 2003 and 2006 clearly revealed the need for enhanced coordination
at EU level. The European Commission, regulators and TSOs concluded that immediate action was
necessary and some TSOs started working together in order to set up appropriate voluntary
structures.
In December 2008, Coreso (Coordination of Electricity System Operators), the first regional technical
coordination centre for electricity was established, bringing together the French (RTE) and Belgian
(Elia) transmission system operators. In February 2009 Coreso launched its operational activities in
a centralised coordination centre in Brussels: “Every afternoon, seven days a week, Coreso provides
forecasts of the electrical flows in the CWE area (France, Belgium, Germany, the Netherlands and
Luxembourg) for the following day (so-called ‘D 1 activities’).”30 Later on, National Grid from the UK,
Terna from Italy and 50hertz from Germany joined Coreso.
Another initiative was also launched in December 2008: TSC – (TSO Security Cooperation). It now
includes 13 TSOs (see Fig. 16) with its headquarters in Munich.
30 http://www.coreso.eu/mission/history-of-coreso/
45
Fig. 7: TSC - TSO Security Cooperation 31
“The TSC IT tool allows member TSOs to access key data and provides them with access to
advanced methods for choosing appropriate remedial actions. These IT services can be used by
TSOs for day-to-day operations in their regions, starting first with day-ahead planning processes. In
a second phase, these services will be expanded to grant TSOs with nearly real-time control over
their operations.
TSC strives to achieve a high level of system security in the heart of Europe. This common IT
platform was implemented in a joint project in 2010.” 32
31 http://www.tscnet.eu/where-we-are/
32 http://www.tscnet.eu/what-we-do/
46
1.2 Major trends shaping the transition towards a low-carbon energy landscape
The transition towards low-carbon electricity systems was triggered by changes in energy policy.
Back in 2007, the EU acknowledged that “given that energy production and use are the main
sources for greenhouse gas emissions, an integrated approach to climate and energy policy is
needed” 33 in order to limit the global average temperature increase to not more than 2° C above
pre-industrial levels. According to the Council, “Integration should be achieved in a mutually
supportive way.”
This “integrated approach” has produced several directives and regulations with significant impact
upon energy markets, mainly as regards the development of electricity from renewable energy
sources.
The EU pledge to cut greenhouse gas emissions was reinforced in 2009 when the Council decided
“to reduce greenhouse gas emissions by 80-95% by 2050 compared to 1990 levels”34. As noticed by
the Council in 2011, this “will require a revolution in energy systems, which must start now”35.
As regards electricity, this “revolution in energy systems” is enabled by a large spectrum of new
technologies, briefly described below, and it is composed of two concurrent revolutions, respectively
on the supply-side (Section 1.3.1) and on the demand-side (Section 1.3.2).
Research into further measures, which may support the successful integration of large amounts of
generation from RES into the power system, have so far delivered numerous options that differ in
the complexity level of their implementation, in their expected costs and in the areas that they
benefit. They range from improved RES forecasts, network monitoring and control to decentralised
storage systems and innovative transmission and smart grid technologies.
A report commissioned by the DG Energy of the European Commission on the integration of

renewable energy in Europe (DNV GL et al., 2014) offered a scenario-based quantitative analysis of
several technical measures. Besides distinguishing them according to the areas of possible cost
reductions, it gives an indicative comparison of their costs and net benefits, summarised in Figure
17.
33 European Council conclusions, 8/9 March 2007

34 European Council conclusions, 29/30 October 2009
35 European Council conclusions, 4 February 2011
47
Source: DNV GL - Report No. 9011-700 (DNV GL et al., 2014)
Fig. 8: Comparison of costs and net benefits of selected technical solutions
Demand response (Chapter 1.3.2) is considered the most attractive option in the report, which at
limited costs can facilitate both the integration of RES and overcoming the challenges posed by
additional loads from an increasing penetration of heat pumps and electric vehicles. The analysis
further showed that measures not requiring significant investments in additional infrastructure and
technological developments, and that thus can be implemented at limited costs (top left corner in
Figure 16), may lead to substantial savings if deployed in combination. Additionally, they ensure full
compatibility with the existing EU Target Model for the electricity market and therefore do not pose
major legislative or regulatory obstacles, in spite of the expected increase in the complexity of the
system operation and market functioning resulting from their implementation. In contrast, the more
expensive options require a location-specific weighing against the costs, as their economic value
strongly depends on the specific situation regarding the existing distribution network and DG
penetration. The report singles out storage systems by questioning whether decentralised storage
will represent an economically justifiable measure by 2030 mainly because of the high capital costs,
high conversion losses and the uncertainty of a major cost reduction of the technologies involved.
A brief review is enough to understand that despite the numerous, individually consistent studies and
projects to assess different possible pathways to achieve a low-carbon electricity system, Europe
has not yet made a decision on an overall consistent strategy to get there. A good example to
demonstrate this occurrence is the position on storage devices. As mentioned before, there are
parties skeptical of their future relevance due to the high costs of these technologies and the
uncertain cost reduction potential that would allow them to be competitive with other options
(Florence School of Regulation, THINK report on storage, 2012). However, other studies consider
48
storage systems “a key component of the future low-carbon electricity system” given their need
relating “to the increase in intermittent wind and solar and to the demand peak increase” (European
Commission, 2013). In other words, “there is no universal answer on whether storage is a profitable
investment or adds value to a system” because “all attempts at storage valuation require making
assumptions on storage regulation” (Zucker, A., Hinchliffe, T., Spisto, A., 2013). “Storage will thus be
affected by the upcoming regulatory discussions emerging from the developments in the power
system, such as market design and rules for RES integration or considerations on ownership and
operation of storage devices” (Zucker, A., Hinchliffe, T., Spisto, A., 2013).
This dynamic is similarly reflected in the area of electric mobility, which experienced a “’turbulent’
period of excitement and promise as well as disappointment” (Amsterdam Roundtables Foundation,
McKinsey, 2014). The electrification of the automotive powertrain, driven either by the goal of a
decarbonised European economy or simply by the automotive sector’s goal of diversifying the
portfolio, still has a low impact in Europe with sales amounting up to 1% (Germany has recently
confirmed a goal of 1 million vehicles in 2020; with no clear implementation strategy). However, even
with low market shares, electric vehicles (EVs) could intensify the disturbances mainly occurring at
the distribution level. Instead of further expanding the grid (a solution that is soon bound to reach its
limit of cost effectiveness and local acceptance), the alternative of adopting some sort of “smart
charging” mechanisms to optimise the EV’s interaction with the grid has been widely discussed. The
extent of the interaction [be it a simple manual and voluntary orientation of the customer to price
signals (Demand Response) or the automatic, remote control of the bidirectional charging and
storing of electricity (V2G, Demand Side Management)] is technically almost unlimited but depends
greatly on economic evaluations, the efforts for improving customer participation and the supporting
policies (e.g. Eurelectric, 2015, Karlsruhe Institute of Technology, 2013). The competitiveness of
smart charging with other flexibility options will be determined by new approaches to capacity
remuneration and reserve markets.
Besides Demand Side Flexibilisation, it is not clear yet which flexibility measures will occur and to
what extent they will characterise electricity systems in the future. Irrespective of this, it is clear that
more flexibility will be integrated in the distribution and transmission grids through, amongst other
things, a large amount of new Information and Communication Technology (ICT). This will combine
with increasing the bidirectional interaction of the grid with its components and users, changing the
interfaces with other actors of the energy systems, diversifying the short-term system operation and
impacting the long-term planning.
49
1.3 The supply-side and the demand-side revolutions
1.3.1 The supply-side revolution
Back in 2007, the EU decided to achieve a 20 % share of energy from renewable sources in overall
Community gross final energy consumption by 2020. This collective target was legally established in
the 2009 renewable energy Directive 36 that also indicates the mandatory individual national targets
consistent with the 20% share at EU level. More recently, the decision was taken to increase this
share to at least 27% by 2030:
“An EU target of at least 27% is set for the share of renewable energy consumed in the EU in 2030.
This target will be binding at EU level. It will be fulfilled through Member States contributions guided
by the need to deliver collectively the EU target without preventing Member States from setting their
own more ambitious national targets and supporting them, in line with the state aid guidelines, as
well as taking into account their degree of integration in the internal energy market.” 37
The EU commitment to cut greenhouse gas emissions, first clearly established in 2007, was
strengthened in 2009 when the Council decided “to reduce greenhouse gas emissions by 80-95% by
2050 compared to 1990 levels”38. According to the Energy Roadmap 2050 (European Commission,
2011a), this overall target translates into a share of RES in electricity consumption between 64% (in
a high-energy efficiency scenario) and 97% (in a high renewables scenario).
The generation capacity of renewable energies has increased considerably in the EU-28 in the last
15 years, as shown in Figure 18. Wind and solar resources have had the largest increase in
generation capacity in recent years. Wind generation capacity has increased from 4 GW in 1999 to
103 GW in 2012. Solar generation capacity has increased from 2 GW in 2005 to 71 GW in 2012.
36 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from
renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC. Official Journal L/140 of 5.6.2009
50
120
100
Generation capacity [GW]
80
60
40
20
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Wind Solar Solid biomass Biogas
Source: Eurostat (online data code: nrg_113a)
Fig. 9: Electricity generation capacities in EU-28
In the period between 2000 and 2014, the net electricity generation growth in the EU was almost
entirely based on wind (117 GW), solar (88 GW) and gas (101 GW), while fuel oil, coal and nuclear
net installed capacities decreased by, respectively, 26 GW, 25 GW and 13 GW 39. In 2000, the total
installed renewable capacity (including large hydro) represented 24 % of the total installed electricity
generation capacity; in 2014, this figure was 42 %40.
The integration of such a large amount of intermittent RES has a substantial impact on the
development and operation of transmission grids. If the electricity system is managed in a territory
large enough, correlation among the input of the different renewable sources will be lower; hence, it
will be easier for TSOs to cope with the high variability, low predictability and specific localisation of
the intermittent RES. Enlarging the relevant geographical area reduces the impact of RES output
uncertainty upon the system operation, as well as the stress on transmission systems. However, this
implies that the TSOs face several challenges related to the management of large power flows
covering vast distances, and the need of significant investments in the transmission network (Olmos
et al., 2015).
According to the ENTSO-E Ten-Year Network Development Plan (TYNDP), RES development is the
major driver for grid development until 2030 (ENTSO-E, 2014a). The TYNDP predicts that the
overall interconnection capacity should double on average by 2030. It also identifies about 100
39 http://www.ewea.org/fileadmin/files/library/publications/statistics/EWEA-Annual-Statistics-2014.pdf
40 idem
51
potential bottlenecks in the European electricity system for the next few years, if new transmission
assets are not installed on time (see Fig. 19). These situations, in which transfer capabilities may not
suffice to accommodate the necessary or likely power flow in a certain grid section at a certain point
in time, can occur due to three main reasons: 1) security of supply, 2) direct connection of
generation, or 3) market integration (ENTSO-E, 2014a).
The first relates to the situation in which the expected quality standards in specific areas cannot be
met due to insufficient supply; the second refers to the installation of new generation capacities in
locations with a limited transmission capacity; the third comprises the necessary distinction to be
made between inter-area balancing that is either internal to a price zone or between price zones.
Source: ENTSO-E, Ten-Year Network Development Plan 2014

Fig. 10: Map of main bottlenecks in the European electricity grid
52
Besides demanding upgrades of the transmission networks, the large-scale deployment of
distributed generation from RES also has an impact on the provision of system services.
Traditionally, large conventional power plants were the main providers of balancing and ancillary
services such as black start capability, frequency response, fast response and the provision of
reactive power. With an increasing share of RES in the electricity generation however, new providers
are urgently needed and thus a review of how the secure operation of the power supply system can
be re-organised must be undertaken. Figure 20 shows the system services reserve as part of the
Net Generating Capacity (NGC) evolution for 2011 to 2013, which experienced a yearly decrease.
Source: ENTSO-E Yearly Statistics & Adequacy Retrospect 2013

Fig. 11: System services reserve as a part of NGC evolution.
In addition, as certain ancillary services such as the provision of reactive power for voltage control
can only be provided locally, requiring distributed generators to provide them seems reasonable.
More than the technical challenges, it is argued that it is the lack of a suitable framework that would
guarantee fair market access and remuneration mechanisms which is the main reason why
distributed generators are not yet significant providers of ancillary services. This is currently being
dealt with at national level, with a wide range of approaches being tested. For an increased
provision of reserve power by Distributed Generators, the most common solutions entail the
alteration of prequalification requirements and the facilitation of market access through, for instance,
aggregation (e.g. virtual power plants). Regarding an increased provision of reactive power, the
solutions range from the introduction of legally binding requirements (e.g. in Germany, VDE 2011)
to the active involvement of distribution grids or customers directly connected to the transmission
grid on a voluntary-basis, which is incentivised through the monetary compensation for the delivered
reactive power (e.g. in Switzerland, Swissgrid 2011).
53
1.3.2 The demand-side revolution
In its updated report on the trends leading up to 2050, the EC defines a Reference Scenario 2013 for
the development of the EU energy system under current trends and policies. Based on those
assumptions, it deduces that there will be a downward trend on energy consumption and that Gross
Inland Consumption (GIC) and GDP growth decouple (Figure 21) – a development that is traced
back, among other things, to the adopted legislation on energy efficiency (European Commission
2014b).
Source: EC, EU Energy Transport and GHG Emissions; Trends to 2050; Reference Scenario 2013
Fig. 12: GIC in relation to GDP.
Opposing this downward trend on energy consumption is an increasing share of the electricity of the
final energy demand (see Fig. 22). According to the scenario-based outlook contained in the Energy
Roadmap 2050, “electricity will have to play a much greater role than now (almost doubling its share
in final energy demand to 36-39% in 2050) and will have to contribute to the decarbonisation of
transport and heating/cooling” (European Commission, 2011a). This will also result in an increasing
electricity demand in absolute terms.
54
Source: EC, Energy Roadmap 2050
Fig. 13: Share of electricity in the current trend and decarbonisation scenarios (in % of final energy demand)
These developments will, of course, put a further strain on an electricity system, which already has
to deal with the fact that the integration of an increasing amount of RES in the power supply system
has moved away from the traditional “supply follows demand” model because of the intermittent
nature of RES. Therefore, in order to maintain the frequency equilibrium, new flexibilisation options
in the power system must be explored, of which an important one is the flexibilisation of the demand
side.
The importance of this measure for successfully completing the transition to low-carbon energy
systems has been repeatedly publicised at European level by institutional players such as the
European Commission (European Commission 2012, European Parliament 2009a, European
Parliament 2012), ACER (ACER, 2014) and CEER (CEER 2011, CEER 2014). The contribution of
demand flexibilisation to energy efficiency and market integration objectives, and the fact that it “can
have a comparative advantage over other sources of flexibility in delivering flexibility at particular
timescales” (Cambridge Economic Policy Associates et al., 2014), are both acknowledged and used
as rationale for large-scale deployments of smart metering systems (European Commission, 2011c).
However, there are still several concerns hindering the Europe-wide progress in response to the
Energy Efficiency Directive requirements. A report issued by the Smart Energy Demand Coalition in
2014 found that only a few European countries “have reached a level where Demand Response is a
commercially viable product offering”, while in others the regulatory framework “remain[s] an issue
and hinder[s] market growth” (SEDC, 2014). Further reservations arise from the economic
uncertainties of the future, as Demand Side Response (DSR) “competes with electricity storage,
higher flexibility generation, and interconnection to provide flexibility services. The value of DSR
depends upon the cost and usage of these other sources of flexibility. Developments in wind
55
forecasting will also affect the value that demand flexibility services can provide.” (Cambridge
Economic Policy Associates et al., 2014).
Despite the numerous studies on the qualitative and quantitative estimations of the benefits and
challenges of Demand-Side Flexibility (DSF) measures and the open discussions, targets and
strategy recommendations, it remains difficult for most Member States and at European level to
assess the future worth of DSF and its position among other flexibility options. As long as there is no
overall optimisation and prioritisation of the flexibilisation options either at European or national level,
it is hazardous to predict the extent to which DSF will be relevant to the transmission system
operation.
1.4 Policies, markets and the system operation
Before liberalisation, electricity systems were required to be reliable and to provide electricity at fair
and reasonable prices. When competition was introduced, first at generation level and for large
industrial customers, later on for all customers, electricity systems were required to provide the
physical infrastructure for the development of efficient wholesale and retail markets. Market rules
and system operational rules had to be defined in order to enable transparent, non-discriminatory
and efficient interactions among market agents, market operators and system operators, while
ensuring the appropriate reliability and quality of service standards.
In different countries, different market models, different system operation models and different
approaches to competition were adopted with differing results.
Today, both EU public policies and national public policies require electricity systems to contribute to
the development of a low-carbon economy. This means basically that:
1. Electricity generation must be increasingly based on low-carbon primary energy

sources (“green electricity”).
2. The electricity system as a whole must improve its (technical and environmental)
efficiency.
3. The electricity system could help other sectors – e.g. industry and transport – to
reduce their carbon emissions.
The consequence of 3) is that electricity should increase its share of total final energy demand;
therefore, the electricity industry is a potential winner of the transition to a low-carbon economy,
while other industries, namely coal and oil, would be losers (assuming no viable Carbon Capture &
Storage).
56
The consequence of 1) and 2) is that the electricity industry should undergo a deep structural
change. This impacts not only the generation mix, the demand participation and system operation,
but also the market design and the interaction between market operators and system operators.
Changes in one area – say, the generation mix and generation profile – have a substantial impact
upon all other areas. The problem one faces is a system of equations with several dependent and
independent variables. A large number of solutions are technically feasible, although the associated
economic, social and environmental costs (and benefits) are not equivalent for each and every
solution.
Advanced information and communication technologies, exhibiting increasing performances and

decreasing costs, help to solve the problem but, at the same time, they introduce new opportunities,
new variables that can also increase the complexity of the basic problem to be solved: how to
manage an efficient transition to low-carbon electricity systems?
Technology developments, as well as social behaviour, economic environments and financial

markets are characterised by considerable uncertainties. The “energy transition” is therefore a highly
political and institutional process, requiring several clear cut political options. However, in order to
identify, compare and select different political options, it is key to have clear, comprehensive views
about their implications for the way electricity markets and an electricity system operation may or
may not be organised.
57
1.5 Three scenarios for the evolution of the European electricity system
Based on the analysis of the current legal and regulatory framework (Section 1.2), the driving forces
behind the transition to low-carbon electricity systems (Section 1.3) and the conceivable interactions
between operational and market changes (Section 1.4), three basic scenarios can be identified.
These scenarios correspond to three “ideal types”, not to the “most likely outcomes”. They are
represented in a schematic form in Figure 23.
INTEGRATION
A ENERGY UNION
DECARBONISATION
Fig. 14: Three scenarios for the evolution of the European electricity system
a) Scenario A: Lower decarbonisation within a pan-European system
For many years, several industry decision makers and academics considered that EU and national
energy and climate policies could be accepted if, and only if, they were compatible with operational
and market arrangements put in place over the previous two decades to accomplish the internal
electricity market – i.e., full integration. This approach corresponds to scenario A in Figure 23: in a
very strict interpretation, it may lead to increased European electricity integration, but it can hardly
contribute to a higher level of decarbonisation, under the assumption that the legacy operational and
market structures cannot accommodate the technological and behavioral changes required in low-
carbon electricity systems. Table 3 describes the main characteristics of this scenario A.
58
DER and Smart grid
The need to achieve the internal market
Large amount of intermittent RES connected to the network technologies impact on the
in electricity
distribution level
1. Higher priority is given to cross-border interconnection projects instead of the development of

Network maintenance and
national transmission networks
expansion
2. There are obstacles created by investment shortages and acceptance issues
4. It may disregard the

potential positive effects of
Connection of grid users 3. Intermittent RES generation plants are not completely free in their locational decisions
innovative solutions (smart
grids, prosumers, etc.)
5. More efficient system operation at European level

8. Reduced need for load
System operation 6. Better use within the region of the intermittent RES located far from consumption centers management and storage
systems
7. Reduction of system operation costs. Reduced need for additional generation capacity
Interface with other TSOs 9. Coordination challenges between TSOs in the network expansion planning and system operation
Interface with other actors

10. More integration and coordination of intraday and balancing markets
(DSOs, market operation)
Table 3: Main characteristics of scenario A: Lower decarbonisation within a pan-European system
59
b) Scenario B: Higher decarbonisation within existing MS systems
In scenario B, EU Member States basically attempt to meet their respective

decarbonisation targets at national level. Each Member State implements its own
energy policy that translates, i.e., into a particular electricity generation mix, imposing
specific requirements upon markets, the system operation and interactions between
them. In this scenario, like in scenario C, there is no real motivation to expand cross-
border trade; however, the “inertia” of current EU arrangements should keep the
integration acquis at the present level.
Table 4 describes the main characteristics of this B scenario.
60
DER and Smart grid
The need to achieve the internal market
Large amount of intermittent RES connected to the network technologies impact on the
in electricity
distribution level
1. Higher priority of national 2. Further development of the national transmission networks

Network maintenance and
projects instead of cross-border 3. There are obstacles created by investment shortages and
expansion
interconnections acceptance issues
5. It may disregard the
potential positive effects
4. Intermittent RES generation plants are not completely free in
Connection of grid users of innovative solutions
their locational decisions
(smart grids, prosumers,
etc.)
6. More efficient system operation at national level
7. Better use within the country of the intermittent RES located 9. Reduced need for load
System operation far from consumption centers management and storage
8. Reduction of system operation costs. Reduced need for systems
additional generation capacity and redispatch measures
10. Low coordination in the network
Interface with other TSOs maintenance and expansion, and
system operation tasks
Interface with other actors 11. Low integration and low coordination
(DSOs, market operation) of intraday and balancing markets
Table 4: Main characteristics of scenario B: Higher decarbonisation within existing MS systems
61
c) Scenario C: Higher decarbonisation within decentralized systems
Several pilot projects on “micro grids”, “smart cities” and similar “bottom-up”
concepts, carried out in several countries, aim at reaching, at local level, “carbon-
free” or “near carbon-free” electricity systems. If generalised, this approach,
corresponding to scenario C in Figure 23, leads to very high degrees of
decarbonisation while, at the same time, reduces the scope for non-local trade –
even more so for cross-border trade, thus de facto decreasing the integration of
national markets at EU level. Table 5 describes the main characteristics of this C
scenario.
62
The need to achieve the Large amount of intermittent RES connected to DER and Smart grid technologies
internal market in the network impact on the distribution level
electricity
1. High investments in new information and communication, monitoring and distribution

Network maintenance grid reinforcements
and expansion 2. Strong competition for investments between new technologies in the distribution grid
and expansion of the transmission network
Connection of grid 3. Significant increment in the DER connected to the distribution grid
users
4. Higher degree of self-sufficiency for local networks (micro-grids, isolated grids)
System operation 5. Higher range of flexibility options in the system due to the high penetration of DER
6. The transmission grid is necessary to ensure the security of supply
Interface with other
TSOs
Interface with other 7. Need of more interaction between TSOs and DSOs
actors (DSOs, market 8. Coordination challenges in the system operation between TSOs and DSOs
operation) 9. Better definition of the responsibilities between TSOs and DSOs
Table 5: Main characteristics of scenario C: Higher decarbonisation within decentralised systems
63
d) Energy Union
The main purpose of the “Energy Union” supported both by the Council and the Commission
is to reconcile decarbonisation and market integration along the path depicted in Figure 14,
enabling the active participation of actors at all levels of the Electricity Union electricity
system.
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2. The role of transmission networks in a low-carbon energy landscape –
Hardware functions
The three scenarios for the evolution of the European electricity systems are not intended as
likely future scenarios. They are deliberately/purposely extreme scenarios. That way, it is
easier to derive the most important possible evolutions of TSO functions. Conclusions are
then not blurred by the complexity of reality. Moreover, not only are the 3 scenarios ideal in a
conceptual manner, but this “analytical abstraction” is also reinforced by our construction of
an “ideally rational” framework for each of these scenarios. For a straightforward analysis, we
indeed assume that all transmission system operation functions are efficiently adapted to
each scenario, aligning with the location and nature of flexibility resources and network
constraints. It has an even stronger implication since the analysis of these conceptual
scenarios doesn’t reveal anything of how a hybrid scenario (see section 4) will absorb the
novelties.
Meanwhile, the idea remains to produce recommendations for the possible and realistic
future evolution of the TSO functions. Consequently, after the analysis of the possible
evolutions of TSO functions in extreme scenarios, two steps will be required to reach
conclusive recommendations (see section 4). First, a consistency check of scenarios will be
needed, to ensure that each scenario allows the functions performed today by TSOs to
continue in order to ensure reliability and system security, avoiding any black hole.
Furthermore, hybrids of extreme scenarios should be considered for two main reasons. First
of all, even if the characteristics of a future power system (in 2030 or 2050) are unknown,
they may nevertheless be bounded by the characteristics of extreme scenarios. Besides, by
nature, the existing power systems do not fit with any of the extreme scenarios but are
already hybrid both in their architecture and in their functioning.
The first step in our framework is to analyse the possible evolutions of the TSO functions
under the three extreme scenarios, scenario A of lower decarbonisation within a pan-
European system, scenario B of higher decarbonisation within existing Member States
systems, and scenario C of higher decarbonisation within decentralised systems. In this
regard, this Chapter focuses on the possible evolutions of hardware TSO functions, namely
the first connection of grid users, second network expansion and maintenance, and third ICT
investment. Chapter 3 will then focus on the transformation of the software functions.
2.1 Connecting the dots – connection of network users …
Network operators must take into account the characteristics of the network users in order to
connect them in an efficient and reliable manner. For instance, as more and more generators
65
and loads are asynchronous (producing with DC or asynchronous turbines) and therefore
getting connected through a DC/AC converter to the AC network, this characteristic must be
taken into account in connection requirements 41. The characteristics of the load are also
evolving. New types of load, such as the electric vehicle are expected to be able to provide
flexibility and reserves, if not storage capacity. Meanwhile, the existing load can also be
retrofitted to become more flexible 42 . Overall, some scenarios dramatically change the
characteristics of network users compared to those of today. This can be analysed
considering the characteristics of generators, namely:
 Their notional size, and thus the voltage level (transmission or distribution level) they
connect to.
 The locational constraints of good quality resources, but dispersed location of poorer
quality resources (wind and PV, storage with different technologies – centralised
pump hydro storage versus decentralised batteries).
 Their synchronous or asynchronous nature compared to the network frequency,
hence naturally providing inertia to the power system and the frequency reserve in
the first case (e.g. conventional generators – thermal, hydro or nuclear power plants)
or being connected to the synchronous network through a DC/AC converter (for wind
or PV generators, batteries or new asynchronous pump hydro storage).
 Their level of predictability over time.
 Their flexibility (at given output level – in particular for variable generators) and ability
to provide network services (e.g. reserves, reactive power or black-start43).
With this regard, it is also important to distinguish the design of rules for connection and the
responsibility of connection operation. Indeed, each DSO can be in charge of the connection
operation of dispersed generators on its (distribution) grid, but a broader system view is
needed to define the rules because they impact upon the generation and load balance,
frequency control, black start, and voltage control on the transmission grid. Although different
organisations may be employed for the operation of connection in the different scenarios, the
process for producing connection rules should be similar in all scenarios, even if participants
41 Remember that the classical power grid technology is alternative current (AC), vibrating at 50 Hz in Europe. It was adopted
for two reasons. First, it was found to be easy to step up or down the voltage level with transformers between transmission and
distribution grids. Second, it was also found easy to develop protection and switchgears on this technology because the current
value is zero 100 times in one second. Generators can be synchronous, generating electricity with the same frequency as the
power network, or asynchronous and then producing energy to a different possibly variable frequency. A third way to produce
and even transmit electricity is to rely on an alternative technology for the power grid, to direct current (DC) with stable values.
42 Note that the ability of the load to become flexible depends on its usage, that it can be postponed, rely on another form of
energy (e.g. heating with wood or a dual fuel heater), or with energy that can be stored (for instance in the form of heat, cold or
in an electrochemical form).
43 Reactive power helps to maintain the local voltage level on the AC power network. As for black-start, it is a service provided
by some generators that are able to start up, even if the network is blacked-out, relying on an ancillary diesel generator.
66
will differ from one scenario to another. Indeed, in all scenarios, considering the system-wide
impact of connection rules, they should be defined at this global higher level. Although the
TSO is one of the most impacted actors in the power system by the definition of connection
rules (if not the most impacted one), it should not, however, set them unilaterally in order to
avoid conflicts of interest. Consequently, as today, existing procedures for discussing the
connection rules should be reinforced and adapted to generation at local level. Connection
rules should be discussed by all the stakeholders (broadly speaking and irrespective of the
scenarios), transmission and distribution grid users, TSOs and DSOs and regulators. As for
the other rules in the power system, the regulator should organise the discussion to set these
rules with the philosophy of a reflexive governance platform (Brousseau and Glachant, 2011).
That way, each of the stakeholders can share its view on the required set of rules (in this
case, connection) with the others. The regulator should then set the rules after identifying
their pros and cons, benefits and costs from the discussions with and between the
stakeholders. In this regard, the scenarios will differ for the main stakeholders participating in
these discussions to set the connection rules.
And lastly, transmission tariffs may also be transformed in the different scenarios. Indeed,
depending on them, geographical differentiations of transmission tariffs encompassing cost-
reflectiveness may bring efficiency, more or less, and equity among the network users. The
cost recovery of stranded assets may also be up for debate in some scenarios.
2.1.1 …in scenario A of lower decarbonisation within a pan-European system
In an extreme scenario of a power system becoming much more integrated at EU level, but
missing the decarbonisation goal (because of relying only on centralised renewable
resources), we cannot expect major change for connections to the network. The sources for
power and network services will still mainly connect to the transmission grid or, to a far
smaller extent, to the distribution grid (as it is today in most of the European countries).
Connection requirements will be very similar to those that we know today, all the more as
there has already been an effort to harmonise it at a European scale with the grid codes
concerning connection (namely requirements for generators, demand connection and HVDC
connection). If this effort is to be pursued, it will mainly take place between the conventional
centralised generators connected to the transmission grid, local control centers of the (one or
67
two) European ISO(s) (similar to the today's TSOs), with these discussions framed by a
European regulator44.
Meanwhile, the location of generators will more likely impact their profitability since a pan-
European system will bring more competitive pressure. It should also be noted that the
location of generators and the resulting cross-border flows are the main drivers of network
expansion (see the last TYNDP, ENTSO-E, 2014). Consequently, it will be more efficient for
the generators to pay a significant share of the network costs in this regard. Indeed, it is only
with this condition that the generators will take the network cost into account while doing
arbitrage with other locational costs (siting, access to primary energy and cold sources, costs
arising from public opinion, etc. – see Olmos Camacho 2006) 45 . The generators pay a
transmission tariff reflecting the impact of the network cost. It is important for consumers to
agree with the needed transmission tariff evolution (as the global cost will inevitably go up).
Otherwise, EU consumers may feel they pay for costs they do not trigger and might oppose
the required efficient network investments.
2.1.2 … in scenario B of higher decarbonisation within existing Member States systems
If a higher level of decarbonisation is achieved within existing Member States systems,

generators will both connect to the distribution and transmission grids depending on their
centralised or dispersed nature. In this extreme scenario, generation should be focusing on
big units with fewer drivers for the development of small units, a certain amount of flexibility
may also arise from consumers, mostly big ones connected to the transmission grid, but also,
to a limited extent, smaller consumers connected to the distribution grid. Then, because of
network users connecting either to the transmission grid or to the distribution grid depending
on their size, and all the more because of the interconnected nature of the transmission grid,
the stakeholders participating in the discussion to set the connection rules should include all
the network users but also the national TSO, and DSOs46. It is only with the participation of
44 We will see in section 3 that the organisation of the power sector should be dramatically modified in this scenario with an
important ISOfication of transmission system operation. One (or two) European ISO(s) should then be settled and national
transmission owners will remain unless some of them merge. To which extent a national level remains will have to be assessed
to keep the power system manageable. An EU ISO would be based on a multilayer control system extended at EU level
encompassing the existing national and regional levels. The TSOs will then remain as Transmission Owners (TOs).
45 It is sometimes argued that network tariffs paid by generators introduce distortion in the energy market. To the contrary, it is
rather the exemption of network tariffs or uniform network tariffs for generators that distorts competition. For instance,
generators pay (or do not pay) the same tariff whether they are close or far from consumers and so require a network service
with almost no cost, on the one hand, and high cost on the other hand. Moreover, the network tariff will be all the more
distortive that they are expressed in €/MW and not in €/MWh because they are then a fixed cost and not a variable cost for the
network users.
46 Note that, to simplify the discussion, we assume that there is only one TSO per Member State. They are, indeed, generally
national entities, even if in some of the Member States, several TSOs operate different parts of the transmission grid, the most
emblematic situation with this regard being in Germany.
68
all these stakeholders that the connection rules will ensure the reliable management of the
interconnected power system. In this scenario with a national focus, these discussions should
be framed by the national regulator.
The TSO will then ensure that despite the asynchronous nature of several generators and
some loads (e.g. electric transportation), the management of the almost instantaneous
balance between generation and load and frequency remains reliable and without partial
disruption of synchronisation. The TSO will also require that these generators, even if more
dispersed and volatile than the conventional generators today, can nevertheless provide
network services to maintain the frequency at 50 Hertz, to produce reactive power helping to
control the voltage level on the transmission grid, or to be able to black start in order to help
the system restoration after a black-out. This is at least partially already included in the grid
codes for connection (in particular the requirements for generation, demand connection and
HVDC – this later one is not adopted yet).
In this scenario, network costs are expected to increase dramatically. Tariffs with
geographical differentiation for the generators could then prompt them to locate more
efficiently, taking into account not only other locational costs (siting, access to primary energy
– and cold – sources, costs arising from public opinion, etc.), but also the network cost
triggered by their connection and use (see, for instance, the project TransmiT led by OFGEM
(2014) to reform the locational transmission tariff in Great-Britain to take into account the
evolution of the energy mix with the integration of more renewable generators). As already
mentioned in scenario A, the generators paying a transmission tariff reflecting their impact of
the network cost is important for consumers to agree the required and efficient network
investments. In scenario B, it is also important for the consumers to agree on higher
decarbonisation and its impact on network costs. A cost-reflective tariff allows each network
user is to pay its share of network costs according to its own impact on the grid. This applies
to the generators whether they are connected to the transmission or the distribution grids.
The distribution tariff could itself take different values for different connection points or
locations. Compared to a situation with no cost-reflective transmission tariffs at the national
scale, the need for transmission investment (and distribution investment) could be reduced to
some extent because the generators will then take into account the network cost and their
other locational costs (siting, access to primary energy and cold sources, costs arising from
public opinion, etc.) in deciding where to locate. The locational differentiation of the tariff
could also apply to the biggest consumers because they also have some flexibility of location.
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2.1.3 … in scenario C of higher decarbonisation within decentralised systems
If higher decarbonisation is achieved within decentralised systems, generators and

consumers will be mainly connected to the distribution grid, and therefore by the DSO.
Meanwhile, because of the interconnected nature of the transmission grid, even at the
national scale and all the more at the European scale, the stakeholders participating in the
discussion to set the connection rules should include all network users, the national TSO and
DSOs. It is only with the participation of all these stakeholders that a reliable management of
the interconnected power system will be ensured, in order to avoid that any local norm could
endanger the management of the interconnected power system. Considering the
decentralised nature of this (extreme) scenario and the need for a certain degree of
harmonisation, these discussions should be framed by the national regulators. An extreme
version of system decentralisation is the mushrooming of self-managed, independent,
unregulated “micro-grids” and “load pockets”. However, it is not necessary to enter further
into it, since it may be assumed that entirely independent –hence autarkic - new energy
systems will not organically interact with the national or pan-European system levels.
We can then expect that the connection requirements will be very similar whether higher
decarbonisation is led at a national scale (scenario B), or within decentralised systems
(scenario C).
In this scenario, transmission network tariffs do not impact the location of new generators
because these are located on the distribution grid, and so primarily pay this local tariff.
Meanwhile, it would be efficient to implement a more-cost reflective tariff and with deeper
geographical differentiation, so that microgrids can only develop when it is efficient at a more
global level. Indeed, in a situation as today where transmission tariffs are uniform, the
network users who have the higher incentive to see the development of microgrids are
consumers located on the distribution grid, and using the transmission network to a lesser
extent (because they are very close, for instance, to a generator being inserted/introduced
into the transmission grid). Consequently, they pay a relatively high transmission tariff
compared to the transmission grid service they need. In this situation, the development of a
microgrid allows them to pay a smaller transmission bill. To the contrary, if they were paying
a cost-reflective transmission tariff, this tariff would be aligned with their use of the network
and, other things being equal, they would have a smaller incentive to see the development of
a microgrid. Consequently, the more cost-reflective transmission tariff with locational
differentiations would only allow microgrids to develop when they are efficient, and not
because of a regressive incentive arising from badly shaped, non cost-reflective and
inefficient transmission tariffs. This also raises the issue of the cost recovery of stranded
assets (see section 2.2.3) because this recovery prevents transmission tariffs from being
70
cost-reflective. On the one hand, the TSO could reasonably desire to recover the cost of its
stranded assets to maintain its overall financeability. On the other hand, by doing so, the
TSO distorts the transmission tariff incentives and prevents the tariff from being cost-
reflective, which pushes for the development of microgrids, further increasing the amount of
stranded assets and fuelling this vicious circle, out of any efficient rationale. A solution for the
TSO could impair its stranded (now useless) assets to make the transmission more cost-
reflective and reset conditions for an efficient development of microgrids. Meanwhile, these
stranded assets could be covered by a kind of public compensation to maintain the TSO
financial equilibrium.
2.1.4 Comparing the grid connection function in the three scenarios
The table below sums up the possible transformation of the transmission grid connection
function in the three scenarios.
Scenarios
Lower decarbonisation Higher decarbonisation Higher decarbonisation
Aspects within a pan-European within existing Member within decentralised
of transmission system States systems systems
grid connection
function
Consultation process integrating all the interested parties under the

Connection rules
supervision of the regulators (as today)
47
Mainly TOs (and DSOs and national
Connection operation DSOs
possibly DSOs) TSO
Stakeholders European ISO(s), National TSO, DSOs, National TSO, DSOs,

participating in the national TOs (possibly distribution and distribution (and
discussion to elaborate DSOs) and centralised transmission network transmission) network
connection rules network users users users
Need to be more cost-reflective with locational differentiations and a tariff

structure aligned with the network cost structure to reflect the impact of
Transmission tariffs
network users on network costs
With impairment of
stranded assets
Table 6: Grid connection function in the three scenarios
47 Transmission Owners
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Whatever the scenario, we can notice that the process setting the connection rules should
include the TSO (whether it is a national one or a European one) and the network users.
DSOs could also participate (when resources of generation and flexibility develop on the
distribution grid). Similarly, in all the scenarios, it is worth making the transmission tariffs
more cost-reflective with a real geographical differentiation to incentivise the location of
generators; to the extreme of impairing the stranded assets in the scenario of higher
decarbonisation within decentralised systems. Inversely, the connection operation will move
from TSOs to DSOs as the power system is more decarbonised and decentralised.
2.2 Merging the meshes – network expansion and maintenance …
The characteristics of the network users (voltage connection, location, synchronous or

asynchronous nature, predictability, flexibility) deeply vary from one scenario to another. For
instance, generators may be getting more and more dispersed (with decentralised
generators), more and more variable with uncertain outcomes (with wind and PV generators).
These characteristics of network users will inevitably change their use of the transmission
network, that may be more dispersed and variable in our illustrative example. As a
consequence, the network operators must take all this into account to plan, develop and
maintain their assets efficiently (with this regard, see the last TYNDP by ENTSO-E in 2014).
2.2.1 … in scenario A of lower decarbonisation within a pan-European system
In this scenario of a pan-European system, new generators, some of them being renewable
or having the flexible use of storage capacity, are all assumed to be centralised (either big
wind or PV farms, or biomass generators; etc.). This makes decarbonisation lower than in the
other scenarios. We can also assume that they have the possibility but not the obligation to
be flexibilised (spilling energy in case of excess production, providing reserves or relying on
local storage capacity). Connected at the transmission grid level, they are hence competing
with centralised classical resources still remaining in the system such as “CO2 compliant”
thermal, hydro or nuclear generators. The consumers are assumed to be just a bit more
flexible than today.
In this scenario, national imbalances persist on the European transmission network, similar to
what we know today, with some countries producing (respectively consuming) more energy
than others. As a result, a major swing of energy can flow through the European network
over time (intraday, between days, weeks, months, seasons or years) and space (between
regions), depending on the load profiles and the national energy mixes (e.g. with national
focus respectively and possibly on nuclear, gas, coal, hydro or renewable energy sources).
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In this pan-European scenario, flows on the transmission grid are expected to increase by a
huge amount and to be more volatile across the whole European power grid. The network
planning should then be done at the adequate geographical scale, meaning at the European
scale, by a European System Operator, as if there was only the ENTSO-E TYNDP preparing
transmission investment planning. Moreover, a higher amount of transmission assets at the
European level than currently experienced will be required. The last ENTSO-E TYNDP from
2014 is an example of what may be experienced in such an EU-first scenario. One main
implication in regulatory terms is that any regulatory authority acting within this scenario
should carefully consider the financeability of transmission owners when regulating their
revenue, since a lot of the existing TSOs (assumed to stay alive in an EU ISO frame as
“Transmission Owners”) have already reached a high level of gearing (Henriot, 2014), at
least in the Western part of Europe (Roland Berger, 2011).
Considering the NIMBY effects and the resulting difficulty to find new rights-of-way, a shift will
be needed toward new and non-conventional transmission technologies. For example,
“phase shifters” and “FACTS”48 offer new ways of optimising the capacity and use of existing
assets. “High capacity conductors” (for extension or refurbished assets) will also provide
more transmission capacity. If technological difficulties are overcome and locations are found
for vast current conversion stations, the wider use of DC technologies could permit more
lines to be buried49. Meanwhile, these technologies may still be more expensive than the
conventional AC technologies to develop and renew the transmission network. Consequently,
investment decisions may be more difficult to trigger because cost-benefit analyses with
positive outcomes will be more difficult to produce. Besides, these technologies are not yet
widely used by the TSOs. They consequently encompass industrial risks (problems to
integrate them, problems to use them in the existing network, the unexpected interaction with
other components in the network, etc.). This makes their integration more difficult and more
risky in an industrial perspective in a power system whose reliability is fundamental for the
whole economy. Besides, the asynchronous nature of some grid technologies (FACTS or DC
lines and DC/AC converters) and generators will create a new risk of the synchronisation
disruption of frequency on the interconnected network. This may make it harder, if not
sometimes impossible, to integrate these technologies in some parts of the AC
interconnected network50.
48 FACTS (Flexible AC Transmission Systems) are power electronics devices used to control power flows, voltage or dynamic
stability of the power network.
49 AC cables can only be buried for tens of kilometres while DC cables can easily be buried for hundreds of kilometres.
50 For instance, the use of DC lines to increase the capacity of transmission grid in Normandy in France to evacuate energy
produced by the future nuclear EPR generator was not possible because of the inherent risk of synchronisation disruption.
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In this scenario, flows from the transmission grid to the distribution network could increase
and important investments of transformers and substations could also be required if
sustained economic growth returns and increases demand for electricity at the distribution
level.
In this EU-first scenario, the organisation of network maintenance will also change with the
scope of flows calculation being set at a European scale. More coordination between the
network owners on widespread cross-border areas will then be required to realise the
maintenance operation while allowing major pan-European transits. Locally and temporarily,
this may create important constraints on the European network, which may still require
additional investments.
In scenario B of higher decarbonisation within existing Members States systems, new

generators, mainly renewable ones or storage capacity, are assumed to be either centralised
(big wind or PV farms, biomass generators) or dispersed ones (small windmills or PV
rooftops, heat pumps), respectively connected to the transmission or distribution grids. They
are also assumed to be flexibilised (spilling energy in case of excess production, providing
reserves or still relying on a smaller local storage capacity). They are competing with
centralised classical resources still remaining in the system (nuclear generators, gas power
plants, etc.). The consumers are themselves assumed to be flexible and demand response is
more developed than today.
In this scenario, the local imbalance persists on the transmission network, similar to what we
know today at the national scale with areas producing (respectively consuming) more energy
than others. As a result, a major swing of energy flows can happen on the transmission
network over time (intraday, between days, weeks, months, seasons or years) and space
(between national regions), depending on the exploited renewable resources and the
effective production of renewable generators (e.g. from windy or non-windy / sunny or non-
sunny / wet or dry seasons). Since energy mixes were only developed at the national scale,
cross-border transits might be limited and far in distance for overall efficiency in this scenario.
Flows on the transmission grid are hence expected to increase in a huge amount and to be
more volatile at the national scale. Note also, that the new sources of energy will not be
located in the same places as the older generators. However, the flows of exchange at the
European level are not expected to be high in this case, since the national decarbonisation is
here assumed to be realised with a national focus. The network planning should then be
done at the policy driven geographical scale, meaning at the national scale, as if there were
74
only National Development Plans, realised by each TSO as it is today. A higher amount of
transmission assets at the national level than currently experienced will then be required. The
regulators should then be very careful about the financeability of TSOs, since a lot of them
have already reached a high level of gearing (Henriot, 2014; Roland Berger, 2011).
Considering the NIMBY effects and the resulting difficulty of finding new rights-of-way, a shift
will then be needed toward non-conventional transmission technologies, with the same
advantages and drawbacks as the ones exposed in scenario A. They will offer more transit
capacity at the national scale while overcoming the Not In My Back-Yard (NIMBY) effect, but
present higher costs and industrial interaction risks, making them more difficult to justify in a
cost-benefit analysis.
Knowing that decarbonisation could push for electrification of some energy uses (electric
transportation, heating, cooling, etc.), flows from the transmission grid to the distribution
network could increase, and important investments of transformers and substations could
also be required, all the more if sustained economic growth was also to return.
In this scenario, the organisation of maintenance will also be impacted by the characteristics
of network users and resulting flows on the transmission grid. In particular, the volatility of
flows on the transmission grid will require the maintenance operation to be scheduled or
rescheduled at the very last minute, or to push for more online maintenance so that the
network operation is less disturbed. Locally and temporarily, it may also create important
constraints on the network. This may still require additional network investments. Flexible
resources of network users (demand response or spilling of renewable energy) may also be
more solicited. Temporary and mobile stationary storage capacity or network assets (e.g.
capacitors or FACTS) could also be used to cope with those local and temporary constraints.
Scenario C of higher decarbonisation within decentralised systems is characterised by

generators and loads as follows. Generators are supposed to be dispersed, relying on local
resources (wind, photovoltaic, biomass, geothermal, etc.) close to consumers. Generators
are also assumed to be flexibilised (allowing energy spills in case of excess production, or
relying on storage in the case of an energy shortage and generally providing reserves). The
consumers are themselves assumed to be very flexible; and decentralised storage is
supposed to be widely spread. As a consequence, the power system is made of almost
autonomous (but not strictly autarkic) microgrids.
The result is that flows on the transmission grid are reduced. That is what is already
searched for, e.g. with some smart cities or "eco-district" targeting energy self-supply
75
(Steinbeis-Europa-Zentrum, 2014). As a consequence, in this scenario, there is no more
need to develop the network and only a small number of ageing assets need to be renewed
(depending on the result of a cost-benefit analysis of renewed assets compared to
decommissioning assets). The transmission network asset base is hence shrinking when it is
still useful, not only at the national level, but also at the European level. To the extreme, this
trend has already produced some grid defections (The Rocky Mountain Institute, 2014 and
2015). In this extreme situation, the network might even become useless. Transmission
planning (even if focused on renewal in the scenario) should then be done at the national
scale considering the limited need for cross-border assets. As already highlighted concerning
the tariffs in this scenario (section 2.1.3), the regulator should manage a possible impairment
of stranded assets, in particular to make transmission tariffs more cost-reflective and to
ensure that microgrids develop only when it is socially efficient to do so.
Maintenance must also be adapted in this scenario compared to the current situation. Since
the transmission grid is less used compared to the current situation, it is less subject to
operational constraints and maintenance scheduling is less of a problem. Possibly,
coordination may be required with the DSOs if maintenance on the distribution grids would
require a higher reliance on the transmission grid to supply, balance or evacuate power from
the maintained part of the network.
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2.2.4 Comparing the network expansion and maintenance function in the three scenarios
The table below sums up the possible transformation of the network expansion and
maintenance function of the transmission in the three scenarios.
Scenarios Lower decarbonisation Higher decarbonisation Higher decarbonisation

of network system States systems systems
expansion &
maintenance function
Transmission asset
Investment dynamics Transmission asset base increasing
base shrinking
Cross-border
MS Investment
coordination for pan- None needed None needed
coordination
European projects
Easier because of a
More uncertain
Maintenance No change compared less used and
because of volatile use
scheduling to actual management constrained
of the network
transmission grid
Possibly requiring
Requiring coordination
coordination between
Maintenance Requiring cross-border between transmission
transmission and
organisation coordination and distribution system
distribution system
operators
operators
Table 7: Network expansion and maintenance function in the three scenarios
Contrasts between scenarios are high. In centralised scenarios (lower decarbonisation within
a pan-European system versus higher decarbonisation within existing Member States
systems), the transmission asset bases are expected to increase, raising financeability
issues for TSOs and the question of adapted regulation. To the contrary, the transmission
asset base should be shrinking in a scenario of decentralised systems. Coordination for
investment or maintenance is rather needed in the pan-European scenario. And maintenance
scheduling will be more uncertain in the scenario of higher decarbonisation within existing
Member States because the network use will be more volatile.
2.3 Managing the slots – provision of ICT for proper system operation
Besides connecting, developing and maintaining the transmission grid, another fundamental
function of a transmission grid is the system operation. If it is mainly a software function (see
section 3), it requires also ICT assets, more precisely six main types:
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1°, Measurement systems to collect information about the state of the power system and its
different variables (frequency, voltage level, power flows, temperature of power lines and
transformers, state of disruptors, wind force and sun irradiance, etc.).
2°, Communication channels to exchange information and instructions with network users
(generation and load forecast and real time levels, technical constraints and prices, orders to
modify their power patters, etc.).
3°, Computation tools to estimate and anticipate the future state of the power system and
possible constraints from its current state variables and their potential evolutions.
4°, Information systems for operating market platforms where different products will be
exchanged between network users and with system operators.
5°, Data storage for some of these pieces of information to be used later on for an ex post
analysis or monitoring.
6°, Devices ( “grid actuators with remote control”) that allow the system operator to modify
the network configuration (changing transformers taps, connecting or disconnecting power
lines, nodes, capacitors or inductors etc.) to adapt it to the need of network users.
These six types of ICT assets needed for the system operation (measurement systems,
communication channels, computation tools, information systems, data storage and remotely
controlled grid actuators) can be developed either at the local scale, the national scale or the
European scale. The most adapted and efficient solutions in this regard will vary from one
scenario to another.
As for the connection function, it is important to distinguish the informal process of discussing
the pros and the cons of alternative rules for those ICT assets from the proper and formal
responsibility of writing and issuing these rules. Indeed, the distribution operator can hence
make its network smarter with more ICT, but rules should be elaborated considering the
impact for all the interested stakeholders under the supervision of the regulator. Different
stakeholders may then participate in the elaboration of rules for ICT assets and different
organisations may then be implemented for the deployment of those assets in the different
scenarios.
In an extreme scenario of pan-European integration with lower decarbonisation, energy will

be expected to flow throughout the whole European transmission grid. Consequently,
optimisation of the network use should be realised at a European scale and the ICT
investments should be adapted to this situation.
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Since current measurement systems and remotely controlled actuators already allow for the
management of power flows at national level, no specific large scale investment seem to be
needed in this case. Only a reorganisation of the data collection would be needed at
European scale. It is also worth noting that Wide Area Measurement Systems (WAMS), the
last generation of large scale measurement systems, are already deployed in Europe and will
continue to spread in order to have a synchronised view of frequency and major power flows
over Europe51.
In this scenario, with Europeanised power flows, it is obvious that it will be more efficient for
computation tools and market platforms to be organised at a European level/ on a European
scale. The same also applies to the organisation of data storage and communication
channels. Besides, data formats are already common to a large extent, or being harmonised
(e.g. with Common Information Model standards – CIM standards52). In this respect, if further
standardisation is still needed, European bodies such as ENTSO-E and ACER will remain
the nexus of the process.
Computation tools, data storage or communication channels could be centralised in a unique

entity, as is already done by the ISOs or RTOs in the USA. Coreso and TSC (Transmission
Security Coordination) are also EU models of centralised computation tools and data storage,
while the various TSOs remain in charge of the direct communication channels with the
network users.
Besides, even if the European scale clearly prevails in this scenario, it leaves different
options open for the organisation of market platforms. For instance, a unique European
market platform can be developed (for a given product – e.g. at the day-ahead stage – or
several ones – e.g. both Day-Ahead and Intra-Day), or several platforms can be coupled and
work shoulder to shoulder as a single entity. Those different solutions do not have the same
resilience. Of course, solutions allowing redundancy will be more resilient. Redundancy can
be at the same level, namely here, at the European scale. Redundancy can also be
implemented at different levels, having sets of computation tools, data storage and
communication systems both at the European and at the national level.
In an extreme scenario of higher decarbonisation realised at the scale of Member State

systems, since the development of generation and flexibility sources (storage, demand
51 www.swissgrid.ch/swissgrid/en/home/reliability/wam.html
52 www.entsoe.eu/major-projects/common-information-model-cim/Pages/default.aspx
79
response, etc.) is both located at the distribution and transmission levels, optimisation of
these resources and the (distribution) grid configuration should be realised both at the local
and national scale. It applies to the ICT investments.
Measurement systems should then be installed at the distribution level to complete those
already installed on the national transmission grid. With historically unidirectional flows,
measurement systems in distribution networks were previously focused at the entry interface
with the transmission network. Since flows on the distribution network will become
bidirectional in this scenario, measurement systems should be spread all over the distribution
grids themselves in order to know the local network transit margins compared to the flows.
Besides, communication channels should also reach to the decentralised network users
(generators or consumers). They will, indeed, provide flexibility to the distribution grid and to
the transmission grid to the same extent as centralised flexibility sources (generators or
demand response).
Even if the management of the distribution system will become smarter and active in this
scenario, the focus and nexus of the system operation will still remain at the transmission
level. Hence, this situation raised a question about the most efficient organisation of
computation tools and market platforms (for instance: centralised; but going down to the
distribution level, or duplicating them at the distribution level). The same question arises for
data storage (totally centralised or distributed between the transmission and distribution
levels). An answer to this question may be determined by the ability of the national
information system of the transmission grid to cope with the massive amount of information
arising from the distribution system that should be managed in this scenario. The question of
data handling should also be considered from a regulatory point of view (responsibility of data
collection, data ownership, data accessibility, independency of data manager, etc.) and
setting an EU principle with this consideration would allow the first corner stone of a
European retail market to be raised.
Whatever the chosen solution, the standardisation of the data format is fundamental to
enable communication for an efficient, secure and reliable operation of both the transmission
and distribution systems. In this respect, the system-wide scale will still be prevalent in the
process to elaborate these standard requirements that local data formats should all adopt.
That is why the supervision of this process by the regulator is fundamental. Considering that
energy and network service providers will mainly compete at the transmission / wholesale
level in this scenario, it will be harmful for the system reliability to let local data standards
develop, even if they are partially interoperable with the main (transmission-centred) data
standards.
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With the connection of part of the new generators on the distribution grid, constraints should
appear on the distribution grids. They should then become smarter to manage them, relying
on remotely controlled actuators.
In the decentralised scenario with higher decarbonisation, the development of generation and
flexibility sources (storage, demand response, etc.) is local: on the distribution grids.
Therefore optimisation of these resources and the (distribution) grid configuration should also
be realised at the local level, like the ICT investments.
Measurement systems should then be installed at the distribution level to complete those
already installed on the transmission grid. Historically, they somewhat stopped at the
interface between the transmission and the distribution levels. Information there was indeed
sufficient to estimate the distribution network state because power flows were unidirectional
on the distribution grid at that time. But the power flows will inevitably become bidirectional on
the distribution grid in a scenario of higher decarbonisation within decentralised systems, and
information at the interface between the transmission and distribution grids will say nothing
about the network state of the latter.
Communication channels should also reach the decentralised network users (generators or
consumers), because they will be sources of flexibility for the power system (at the local level
and at the interconnected level in last resort situations – see section 3.1 about the
transformation of the system operation function).In addition to providing information on the
state (power levels) of the network users, new ICT arrangements will also reveal their margin
levels with regard to the different network services (power reserves for the interconnected
transmission system, reactive power for the distribution grid, the dynamic ability to change
their power levels, etc.).
Since the bulk of the management of the power system will shift to the distribution level in this
scenario (see section 3.1), it will be more efficient that computation tools and market
platforms be localised at the local scale and duplicated in each distribution network.
Consequently, it will also be more efficient for data storage to be organised at the local scale.
Of course, the TSOs should still have computation tools and storage capability to manage
their own grids and the residual and last resort generation and load balancing (see section
3.1). That said, the computational capabilities of the TSO remains as it is today, with all the
tools needed. Note also, that this organisation will ensure the resilience of the information
system of the whole power grid. The information system of the distribution grid will, indeed,
be mostly able to cope with any problem on the information system of the transmission grid.
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Inversely, transmission ICT could partly rescue the information system of the distribution grid
in case it experiences any problem, unless there is a redundancy of the information system of
the distribution grid at the local scale.
Even if the system operation will happen mainly at the distribution level, and only as a last
resort at the transmission level, the standardisation of data format may still be required to
enable a formatted and easy communication for those last resort situations. With this in mind,
the system-wide scale will still be prevalent in the process to elaborate these standard
requirements. That is why the supervision of this process by the regulator is fundamental.
Since most of the energy will be locally exchanged, those standards can only be minimal
requirements that local data formats should share, while DSOs can also complement them
depending on their local needs and standards.
Following the same rationale, since the core of the management of the power system will
shift to the distribution level in this scenario, the distribution network should be smarter, with a
more dynamic behaviour of local grids, relying on remotely controlled actuators. This would
allow the distribution system operator to adapt the configuration of its grid to the generation
and load patterns. It also has an organisational impact, as it will require the unbundling
requirement (already imposed on TSO) to be extended to DSO to prevent any conflict of
interest between network management and the related competitive activities.
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2.3.4 Comparing the ICT investment function in the three scenarios
The table below sums up the possible transformation of the ICT investment function in the
three scenarios, in particular which entity should drive it.
Scenarios

of transmission system States systems systems
grid connection
function
Measurement systems
One or two EU bodies
Communication DSOs and national
responsible for system DSOs
channels TSOs
operation
Remotely controlled
actuators
Computation tools
Different possible
Mainly DSOs versus
organisations between Different possible
TSO for last resort
Market platforms a European System organisations between
action for the
Operator and national national DSOs & TSOs
transmission system
TSOs
Data storage
Table 8: ICT investment function in the three scenarios
To conclude: these ICT investments should be realised by the most suitable/appropriate

entity, aligned with the geographical scope of each scenario (respectively the European,
national or local one). Meanwhile, different organisations are possible for computation tools,
market platforms and data storage in the centralised scenarios (namely with a lower
decarbonisation within a pan-European system or a higher decarbonisation within existing
Member States systems), from very centralised organisations managed by the operator with
the larger geographical scope (respectively the European System Operator in scenario A and
the national TSOs in scenario B) to organisations also relying on shared responsibility
between different geographical scopes and system operators (respectively the European
System Operator and national TSOs in scenario A; and the national TSOs and DSOs in
scenario B). Whatever the scenario, it should be noticed that the digitalisation of the system
operation and market operation will maintain the need for common standards for ICT to allow
interoperability between the actors in the power system.
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3. The role of transmission networks in a low-carbon energy landscape –
Software functions
Like the hardware functions, “software” functions of transmission and system operation will
also experiment with transformations in the different scenarios. This section hence focuses
on the possible evolutions of software TSO functions, namely the system operation and
coordination between TSOs, as well as vertical interaction with other power system actors
and institutional players.
3.1 System operation and horizontal coordination between TSOs …
Any change from the current situation to one of the three stylised scenarios would require a
major transformation of the power system operation, and even these scenarios are quite
different from each other. Transformation will impact not only day-ahead and intraday
markets, but also balancing and reserves markets. The definition of energy and reserves
products should adapt to each scenario (including the definition of price zones and the
organisation of the dispatch – being self-dispatch versus central dispatch).
Moreover, the liberalisation process has shown that horizontal coordination between TSOs
has been one, if not the, key success factor. Since the different stylised scenarios do not
entice the same degree of interconnectivity between the TSOs, one should then expect
different organisations for the coordination of TSOs in each scenario.
A major transformation that should arise in the pan-European scenario should be the system
operation. If this scenario was to happen, it would require that the system operation be no
longer organised at the national scale but at a European level. Of course, it would rely on the
momentum of current arrangements, in particular the major step of harmonisation permitted
by the grid codes and day-ahead market coupling (see ENTSO-E, 2014b). This
harmonisation process should also expand to intraday markets as well as to balancing and
reserves markets, as already planned (see ACER, 2014). A pan-European market would
then expand to all the energy and reserves products, leading to a true European level playing
field for all the competitive market players.
Nevertheless, one cannot expect major changes in the proper definition of electricity
products. Indeed, in this scenario, no new massive integration of renewable energy is
expected. The energy mix will still be grounded in conventional generation. The definition of
the current electricity products fit conventional generation. The hourly or half-hourly definition
of energy blocks would fit the dynamics of conventional (rather thermal) generators. Since
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there would be no major shift in the energy mix in this scenario, one should not expect major
changes either in the energy sources or in their location. Hence, the price zones as they are
defined today at the national scale, or at the regional scale in some countries, should fit the
energy mix and its location. The need for reserves in this scenario is quite predictable and
stable over time (depending on the load level and unexpected outages of generators – mainly
thermal ones). Reserves products could hence be defined as long term ones, up to monthly
or yearly products. Consequently, no finer time and space energy and reserves products
would be needed in this scenario. Self-dispatch of generators could still be the rule in this
scenario, meaning that suppliers would propose bids and offers encompassing several units
to mutualise their technical characteristics, in particular to better fit the definition of energy
and reserves blocks. Finally, in this scenario, the question of a capacity market should be
investigated and put in place with European implementation, if required.
A further ISOfication of the European transmission system operation is needed in this

scenario to allow a Europeanisation of electricity markets. In a scenario of deep
Europeanisation, more and more tasks of the system operation have become independent of
national TSOs, even if it came from their initiative. Nordpool or market coupling were set by
TSOs' subsidiaries. CASC was also set by TSOs to auction transmission capacity. TSOs
have also set regional associations to share good practices about technical procedures, then
extended to generation adequacy, market operation and network development planning.
ENTSO-E is now in charge of all these activities at the European level.
TSOs have also seen an opportunity to cooperate in Regional Security Coordination

Initiatives. While the security analysis and dispatching have historically been managed at the
national or infra-national scale to ensure that flows do not exceed the capacity of power lines,
several events (in particular the blackouts in Italy in 2003 and in Western Europe in 2006)
have made it necessary to have a common security analysis on a broader scale, either
multinational and even European-wide. Both Coreso and TSC were considered in this way. It
is only with a whole view of the interconnected power system that one can understand how
each part is functioning. One event - even if a bit old - makes it clear. On the 14th of July
1999, the Belgian power system suffered a situation where, on average, 59% of power flows
(and up to 76%) through its network were unscheduled, creating unexpected constraints.
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Power (MW)
Hours
Planned flows Unidentified flows Share of unidentified flows
Source: RTE & Elia, 2002

Fig. 15: Power flows through the Belgian power network, 14th July 1999
This was because physical exchanges had not been forecasted to take place between
France and the Netherlands through Belgium. Indeed, commercial exchanges were mainly
planned between France, Switzerland, Germany and the Netherlands and more directly
between France, Germany and the Netherlands, but not strictly between France and the
Netherlands through Belgium. However, these commercial exchanges indeed led to physical
exchanges between France and the Netherlands through Belgium. Coreso or TSC with their
European vision of the patterns of power generation, load and flows would have been able to
forecast such a situation and propose corrective actions to avoid a real time overload of the
Belgium power system while there were only limited possibilities for responsive actions at
that time.
Similarly, Grid Control Cooperations (German GCC – Grid Control Cooperation – IGCC, e-
GCC) were set by TSOs to mutualise imbalances. That way, it avoids the following typically
adverse situation. Assume that an interconnected power system is managed by two TSOs (A
& B). TSO A notices a lack of energy on its national system and dispatches a power plant
upward to re-balance the generation and load (on its national system); meanwhile TSO B
notices an excess of energy on its national system and dispatches a power plant downward
to re-balance generation on its national system. Each TSO acts in opposition to the other
while their imbalances could have been mutualised.
This is inefficient for two reasons. First, it is costly because the upward dispatching of the
power plant in country A is more expensive than the downward dispatching of the power
plant in country B. This is a general statement because you usually have a higher number of
generators that can be dispatched downward (because they are already running) than the
number of generators that can be dispatched upward (because they must be started up, as
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quickly as possible). Besides, it endangers the interconnected system security. Indeed, each
of the TSO reduces its reserve margin, activating a balancing order (TSO A reduces its
upward reserves while TSO B reduces its downward reserves) that would be needed in case
a new imbalance appears. Mutualising the national imbalances before triggering balancing
actions would leave the (downward and upward) reserves untouched at no cost. The TSOs
would then limit their actions to the ones really needed to re-balance system-wide
imbalances. In parallel, this scenario should also see the implementation of a unique EU-
wide balancing market. Even if this is harmonised, it should also be adapted to the locally
available balancing products allowing an efficient balancing management (e.g. replacement
reserves activated several hours ahead of real time to maintain a high enough volume of
frequency restoration reserves some hours later). Having different habits in system balancing
(as TSOs can choose to reserve more or less power in advance; and be more or less
proactive ahead of their operational balancing window), the EU–wide harmonisation of
balancing will surely require a lot of discussion between TSOs to understand each other’s
point of view and practices, to integrate them and to find a common efficient solution adapted
to the different national system dynamics (from very flexible hydro-based power systems to
far less flexible thermal-based power systems).
This whole process of ISOfication will continue to expand on the European power system
while transmission ownership could remain diversified at the national scale. Indeed, even if
this process was pushed, some European regulatory pressure (in a broad sense from the
European directives and regulations), new organisations were born from initiatives of a
vanguard of TSOs before seeing other newcomer TSOs expanding them (see market
coupling and price coupling of regions; RSCIs; GCCs; UCTE then ENTSOE being
progressively extended). It is certain, that such a process is to be reinforced by a new
European legislative production53. To the contrary, any merger or reallocation of transmission
assets between TSOs is constrained by the willingness of their shareholders (whether they
are public or private). While we have seen several initiatives for merging part of the system
operation at a multinational level in Europe, only two acquisitions of TSOs by others did occur
(in 2010, the Belgian Elia acquiring the German 50Hertz with IFM; and Tennet the Dutch
acquiring another German Transpower).
53 Note that a further ISOfication in Europe will question the national scope of responsibility of system operation imposed on
TSOs by their national law. With this regard, this scenario should require a change in the scope of responsibility of system
operation toward the European level with an adequate legislative framework.
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In an extreme scenario of higher decarbonisation within existing Member States systems,

one should not expect major changes in the scale and responsibility of the system operation
(except for multi-TSO countries as already seen in the UK). The national scale should still be
prevalent. Of course, it would rely on the momentum of current arrangements, in particular
the major step of harmonisation permitted by the grid codes and day-ahead market coupling.
This harmonisation process could also expand to intraday markets. But as soon as balancing
and reserves markets are concerned and encompassed the responsibility and liability of
TSOs as regards to their national law, one should expect no major change. The principle of
subsidiarity is indeed central in this scenario, since decarbonisation is led at the national
scale.
To the contrary, major changes in the definition of electricity products would be needed to
facilitate and incentivise/allow for the integration of renewable energy. Indeed, in this
scenario, an extremely large amount of renewable energy would create a lot of temporal and
spatial constraints within the national systems for two main reasons:
1°, renewable sources, mainly wind and PV, are difficult to predict and significantly variable
for a far shorter duration than an hour;
2°, they are generally located in areas where there was previously no, or a low level, of
power production. Wind mills may locate in coastal or rural windy areas. PV power plants
may locate in sunny areas. They may connect both on the transmission network and on the
distribution network depending on their unit size.
Besides, in this scenario, a development of demand response both on the transmission and
the distribution grids should be expected.
The existing electricity products as defined today would not then fit both the massive
integration of renewable energy and the demand response novelties, whether these
resources are concentrated or dispersed. The hourly or half-hourly definition of energy blocks
would not fit the quicker dynamics of renewable generators and demand response (see figure
25, for an example with photovoltaic production). From the side of a photovoltaic generator or
an aggregator aggregating PV, at the moment where the photovoltaic production ramps up in
the morning, during the first half of this ramping hour, there is a deficit of energy between the
energy being sold and the energy being produced by the PV. While, for the next half hour, it
is the opposite and there is a surplus of energy between the energy sold and the energy
produced.
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Source: Markedskraft Deutschland GmbH
Fig. 16: Market design specific reasons for ID trading in Germany: The Sunrise Quarters
Considering the expected high amount of photovoltaic production, this would create an
important imbalance. That is why a specific day-ahead market, based on 15-minute products,
has to be cleared just after the common coupled day-ahead market based on one-hour
products. That is also the reason why the intraday market was organised for 15-minute
products in Germany. That way the market players are allowed to cope with the ramp up and
ramp down of PV energy (see figures 26).
For the first half of a given hour while photovoltaic is ramping up, photovoltaic producers are,
on average, producing less than what they sold on the day-ahead market based on one-hour
products and are then forced to buy energy to re-balance. In the opposite case, for the
second half an hour (while they are ramping up), they are on average producing more than
what they sold on the day-ahead market based on one-hour products and must then sell their
excessive energy to re-balance. Markets with one-hour products ignore the oscillating
behaviour of PV while the photovoltaic production is actually ramping up or down within the
one-hour product window.
The other way around, demand response or battery-based storage capacity can be very
flexible. Their flexibility will only be valued to a high enough price if the energy and reserves
products have a fine enough temporal definition (see the decisions by the Federal energy
regulator in the USA on this topic – FERC Order 784 (2013) and FERC Order 755 (2011)).
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Source: Markedskraft Deutschland GmbH
Fig. 17: “The Sunrise Quarters” causing a systematic daily price pattern (Volume weighted average prices for
quarters)
Besides, since the location of renewable energy sources in this scenario would be quite
different from the location today of conventional generators, the network will have to be
adapted and new congestions will appear. Hence, the today price zones defined at the
national scale, or infra-national scale in some countries, would be outdated. A reflection on
congestion pricing and the price zone definition is hence needed. Without a redefinition of
price zones, too much redispatching would be needed. But this is inefficient because it does
not give any signal where network constraints (congestion or voltage constraints) are located.
It is mutualising their cost and gives ideally placed market players the opportunity to create
these congestions while proposing their services at a very high cost in order to relieve those
under pressure (Hogan, 1999). This problem also appears if the price zones have to be
frequently redefined because the congestions are moving on the network with flows, all the
more if the generation and load are variable (renewable generators and demand response),
and generally more quickly than the redefinition of price zones (Stoft, 1998). Nodal pricing
would handle this problem efficiently, integrating the detailed configuration of the network into
the market representation. But this is to the expense of new types of costs (transaction costs,
hedging costs against locational price differentials, etc.). These should then be compared
with the benefits to come before a recommendation or a mitigation action with this regard.
Whatever the final chosen solution, a mutual optimisation between system operation and
market operation would be required to ensure a secure and efficient management of the
power system.
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Because of the limited predictability of renewable energy sources, the activation of reserves
would be higher and less predictable over time (depending on the load level and unexpected
outages of generators – mainly thermal ones). Reserves products should hence be defined
on shorter periods to adapt to the actual variation induced by renewable generation.
Consequently, finer time and space energy and reserves products would be needed in this
scenario.
Considering the need for flexibility and the network constraints in this scenario, the system
operation and market operation should be more integrated. That being said, and to sum up
what was shown in the previous paragraph, the energy and reserves products should be
redefined to take into account, as precisely as possible, the technical constraints, by
progressively merging the system operation and market operation. A mutual optimisation of
the market and technical conditions could then be achieved.
Meanwhile, generators as intermittent renewable generators (wind or PV generators) should

not be isolated from balancing the responsibility usually borne by TSOs or incumbents. A
generalised balancing responsibility should apply to all types of network users in particular to
the intermittent renewable generators. That way, for generators putting a strain on the power
system, balancing would be incentivised to find ways to compensate their intermittency
(either with better generation forecast, taking the margin to sell their production day-ahead,
rescheduling with intraday products, or pooling their production with those of other
generators, etc.).
In this scenario, even if the system and market operation should be based on a central
dispatch, it should also remain open to innovation from market actors. For instance,
compared to what we see today, a wider participation of renewables, DR and decentralised
resources (generation, storage and DR) to the market and system operation should be
achievable. This should be eased by the redefinition of reserve and energy products.
Furthermore, markets should place a higher value in resources that can track signals for
reserves and balancing needs (e.g. frequency containment reserve, automatic recovery
reserve, ramping), considering the very high requirement of flexibility in this scenario.
And finally, in this scenario, a capacity remuneration mechanism could be needed to provide
more stable revenue to (efficient) back-up generators. Otherwise, the volatility of their
revenues (from the energy-only markets) would prevent them from investing, being too
unstable/unpredictable and risky.
Contrary to scenario A, this scenario B would not assume a further ISOfication of the
European transmission system operation. Of course, the momentum of the current EU
arrangements (ENTSOE, RSCIs, GCCs) could remain. Nevertheless, the deeper
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decarbonisation is grounded on subsidiarity and national resources only in this scenario. In
an extreme sense, there would be no highly organised reliance on external resources. In
order to do so, the national power systems must be oversized to be able to cope alone with
the variability of renewable generators (e.g. with a lot of back-up capacity – in the form of
generation, storage or demand response – or with an outsized national transmission network
to mutualise their indigenous renewable energy sources). The absence of cooperation for
system operation at the European level would be compensated by a far higher expense in
fixed costs (in generation, storage, demand response and transmission capacity).
In an extreme scenario of higher decarbonisation within decentralised systems, one should

expect major changes in the scale and responsibility of the system operation and in the
definition of energy and reserves products. Of course, this would rely on the momentum of
current arrangements (grid codes and market coupling). Meanwhile remember that, in this
scenario, generators are assumed to be flexibilised and close to consumers, the consumers
being also flexibilised, and decentralised storage to allow for it to be widely spread.
As a consequence, the core of the system operation should shift from the transmission level
to the distribution level. Indeed, balancing and reserves should be mainly organised at the
local scale because the distribution grid would aim at being almost autonomous microgrids.
As a result, the network constraints management should also focus on the distribution
network while the transmission network should be less used as a primary action tool. This
permits that the price zones for products offered at the central (say national), level as they
are defined today for the wholesale market would not be necessarily questioned in this
scenario. Moreover, reserves could still be shared at the transmission level to some extent
and the transmission system operation could still organise an open & reliable last resort
balancing.
Considering the limited role for the transmission system operation in this scenario, it does not
seem essential to refine energy or reserves products with higher time granularity or higher
integration between the system operation and market rules, and we see no need for a central
dispatch. However, to the contrary, a reflection on interchangeable products between
national TSOs could be initiated in this scenario. In parallel, it is worth noting that both the
distribution system and market operations should be entirely revisited in this scenario
compared to what we know today. Finer energy and reserves products with higher time
granularity and higher integration between the system operation and market rules should be
deployed at the local level by the distribution system operators. Furthermore, the
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development of different local market models would question the fairness and the reliability of
the power market because of its very local nature in this scenario.
This scenario would not assume a further ISOfication of the European transmission system
operation. Once again, decarbonisation is grounded on local resources only. That said, in an
extreme manner, there would be no fundamental reliance on resources at the transmission /
wholesale level, either from a national or a European point of view since flexible resources
are assumed to be mainly at the local level. One should nevertheless notice that the
momentum of the current EU arrangements will remain in this scenario, and that imbalances
could always be mutualised in a GCC-like manner, even if no major convergence of a
balancing mechanism is needed here.
3.1.4 Comparing the system operation function in the three scenarios
The table below sums up the possible transformation of the system operation function in the
three scenarios, in particular concerning the organisation of the day-ahead and intraday
markets, the balancing and reserves markets, the definition of energy and reserves products
as well as the possible ISOfication of transmission system operation functions.
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Scenarios
within a pan-European within existing Member within decentralised
Aspects
system States systems systems
of system
operation function
Day-ahead and
Relies on momentum of current EU arrangements
intraday markets
 No driver for further
pan-European
(Transmission) Pan-European system markets
No driver for further
balancing and reserves operation and markets
pan-European markets  TSO as the last
markets (RSCIs, GCCs, etc.)
resort balancing
provider
No major change at
Need to refine energy
the transmission level
Definition of energy No major change: and reserves products
and reserves products  (half-)hourly  Quarter-hourly  (half-)hourly
 Energy products
energy products energy products energy products
time granularity
 Monthly or yearly  Daily or intraday  Monthly or yearly
 Reserves products
reserves products reserves products reserves products
time granularity
 Unchanged pricing  Reflection on  Unchanged pricing
 Price zone
zones congestion pricing zones
definition
and definition of
 Self- or central
price zones
dispatch
 Self-dispatch can  Mutual system and  Self / distributed
remain market operation dispatch
ISOfication of
transmission system Required Not needed Not needed
operation
Table 9: System operation function in the three scenarios
To conclude: if one should expect that the momentum of current EU arrangements should
persist in the three scenarios, they should differ by the form of balancing and reserves
markets, the definition of energy and reserves products and the need for ISOfication of the
system operation. Balancing and reserves markets will then mainly be aligned with the
relevant scope of each scenario (i.e. respectively a European, national or local level).
Besides, one should expect no major change in the definition of energy and reserves
products on the wholesale market in the pan-European and decentralised scenarios. But the
nationally decarbonised scenario requires a definition of energy and reserves products that
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should be finer and closer to physical rules with central dispatch both in order to cope with
the constraints of flexibility and to push for the flexibility resources.
3.2 Interactions with other players in the power system supply chain
Setting aside the interaction with other TSOs, in a power system supply chain, a TSO
interacts mainly with the DSOs, the final network users being generators and consumers
directly connected to its network, market participants (that are partly the same as network
users but that can also be pure traders or more financial actors) and institutional actors (in
particular the national regulatory agency, national government, or the European Commission,
and local communities impacted by its assets). These interactions would certainly be highly
impacted by the different scenarios as compared to their nature today.
In an extreme scenario of a pan-European system, the interactions of a TSO with the other
economic agents will end up organised mainly at the European scale. Hence, the DSOs are
not expected to interact more than today with the TSO (ISO or TOs) because no important
decentralised resources are expected to develop in this scenario.
The interaction of market players with TSOs is not expected to change dramatically in this
scenario. As today, they will remain centralised market players with different sources of
flexibility. To the extreme, market players could face one or two ISOs over Europe as a
whole. Otherwise, they will still propose portfolio bids or offers for the whole set of energy and
reserves products, localised in the different existing bidding zones. An important change
could still occur from the new transmission arrangements in order to compel generators to
optimise their location in the whole of Europe taking into account the long term constraints of
the EU transmission grid. This point has already been mentioned in the theoretical literature
in Europe (e.g. Comillas 2002). Nevertheless, it generally faced a fierce opposition from the
generators (e.g. see Association of British generators in 2002 against losses; recent cases in
Belgium and a decision in France).
If generators could see a new type of transmission tariff applied, consumers could also suffer
an increase in the transmission tariff depending on the effective load increase. Indeed, in this
EU-first scenario, major transmission investments are required, calling TO revenues to
increase substantially. Consequently, if the load itself does not sufficiently increase, given the
higher transmission revenue needed, the transmission tariff for consumers will indeed
increase. Otherwise, if the load sufficiently increases, the transmission tariff for consumers
could stabilise or even decrease.
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The computation of a new tariff is also the main change that could test the relationship
between TSOs and the institutional players (namely the regulators including ACER and the
European Commission). The institutional players would have to agree on this new
transmission tariff for generators (today very low under the 838/2010 regulation; see opinion
by ACER, 2014). This calls for harmonisation and the resetting of the tariff structure in most
of the European countries.
Besides the tariff structure, the question of transmission financeability should also pop up and
impact the interaction between the TOs and the institutional players. Indeed, in this EU–first
scenario, major transmission investments are required, tariffs are hence expected to increase
substantially, and the TOs will need a great amount of extra financial resources (either in the
form of an external equity injection or debt issuance, or an increase in regulated revenue).
Regulation should then be adapted to this situation. Regulation should provide enough
guaranties that tariffs and the regulatory regime will be remain stable, so that financing can
be done in the easiest and cheapest manner (see Roland Berger 2011 and Henriot 2014). To
conclude, the relationship related to the network codes is expected to keep on the same track
as today.
In an extreme scenario of a Member State-first system, the interactions of the TSO with the
other economic agents occur and are organised mainly at the national scale. The DSOs are
expected to interact more than they currently do with their national TSO(s) because
decentralised (renewable generation or demand response) resources are expected to
develop significantly in this scenario to deeper decarbonisation. It will then be necessary to
better and more fully account for the mutual impact of transmission and distribution system
management decisions. For instance, when a legitimate (transmission originated) balancing
decision creates congestion on a distribution network. As a consequence, the congestion
management decisions at the distribution level should be conceived to be either neutral with
regard to the (transmission) power system balancing or having to pay a (transmission)
imbalance originated by a DSO reaction. That way, either it is effectively neutral for the
transmission power system or the DSO bears the cost of the actions on its network creating
imbalances for the whole transmission power system. The other way around, the value of
decentralised (generation or demand) resources for the management of the transmission
system should not only consider their declared price in the balancing market, but also their
shadow cost for the distribution system that is positive (resp. negative) if it creates (resp.
relieve) a distribution network congestion, and zero otherwise. That way, the national TSO
takes into account the local impact of any of the nationwide system decisions. This leaves
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open the concrete organisation of the system operation between the distribution and
transmission system operators. Even if the system operation becomes more relevant at
distribution level, this does not mean that the distribution system operators will act in a
discretionary manner. Three solutions can be envisaged:
- distribution system operators perform the system operation on their network within
the format of their respective transmission system operators . Distribution system
operators should then closely communicate with the TSO, in particular for the
shadow cost of decentralised resources.
- the transmission system operator expands its own system operation over the
distribution systems operation.
- TSO and DSOs share a kind of TSO-DSO security cooperation initiative. Note that
whatever the chosen solution, the corresponding data hub design should be
consistent with the chosen option and the beaded consumer data protection.
In this scenario, the interactions of market players with TSOs are also expected to change
dramatically. Since decentralised resources develop and compete with centralised resources,
market rules should adapt to those new resources (with a decentralised, variable but
flexibilised nature) while also allowing the aggregators to participate in the market. Market
players, facing the national TSO as today (and also their own local DSO), should then
propose unit bids or offers for the whole set of energy and reserves products, being now (in
this scenario) localised at the nodal scale within a central dispatch with shorter energy
duration and reserves blocks jointly optimised. Another important change could still come
from new transmission tariffs for generators. It is related to locational incentives given at the
national level - taking into account the long term constraints of the power transmission grid;
and with the same opposition expected as that mentioned for scenario A. Moreover, as in
scenario A and for the same reason, consumers could also suffer an increase in the
transmission tariff if their load does not sufficiently increase compared to the transmission
revenue needs.
Once again, as for scenario A, the computation of the new tariff is a main topic that should
change the relationship between TSOs and the institutional players. However, the deemed
institutional players are different in that it is an EU-first scenario and restricted here to
national regulators. The interaction with the European institutional players (as ACER and the
European Commission) should remain limited in this scenario, focusing on the national level.
Each NRA should then define a new transmission tariff for generators. The national
regulation should also be adapted to the high need of financial resources for TSOs in this
national scenario. To end, the relationship linked to the network codes is expected to be
loosened since this scenario gives a greater role to the national subsidiarity. Note also that
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the NRA will have to frame all the discussions for redefining the energy and the reserves
products.
In a scenario of extremely decarbonised and decentralised systems, the interactions of the

TSO with the other economic agents remain organised mainly at the national scale. The
DSOs are expected to interact with their national TSOs mainly when they are out of local
balancing resources. Similar to national scenario B, this leaves open the concrete
organisation of the system operation between the distribution and the transmission system
operators. DSOs could conduct the system operation on their network independently, as the
transmission system operator does today. Another framework could be that the transmission
system operator expands its system operation to the distribution system operation. Similarly,
for connection contracts, two arrangements can be implemented, between the TSO, the
DSOs and the network users connected to the transmission grid. A first option could be that
the TSO imposes a quality requirement/control on the DSOs in their connection contract to
the transmission grid. The DSOs are then compelled to transmit and translate those
requirements in their connection contracts for the distribution grid. Another solution could be
that connection to the distribution grid is necessarily a three-party contract between
distribution network users, DSO and TSO, hence including, directly, the TSO requirements.
In this scenario, the interactions of market players with TSOs are also expected to change
dramatically. Since markets are mainly organised at the local scale and the TSO should
mainly be solicited for last resort balancing, the interactions of market players with TSOs
should be very limited. Market design will have to be adapted to the highly decentralised and
intermediated nature of power resources. As for the transmission level today, transparent
rules will then be needed at the local level for designing the market, with the unbundling of
the DSOs in order to avoid conflicts of interest. Meanwhile, there is no need for a more
refined market design at the national and European scale because of the reduced volume of
transactions. An important change could still happen from the application of a geographically
differentiated transmission tariff to DSOs in order to induce them to optimise the development
of local generation resources; and see more microgrids deployed only where it is efficient.
Moreover, as in scenario A and for the same reason, consumers could also suffer from an
increase in the transmission tariff if their load level does not match the transmission revenue
needs. This could easily become a very pointed/prickly issue.
Once again, as for scenarios A and B, the computation of a new tariff is the main topic that
should change the relationship between TSOs and the institutional players. However, the
deemed institutional players are different from EU-first scenario and restrained to national
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regulators only - since the interaction with the European institutional players (namely the
ACER and the European Commission) should remain limited in this scenario, focused on the
local level. The NRAs should then agree on a more cost-reflective transmission tariff and the
impairment of transmission stranded costs (with a possible compensation by means other
than a transmission tariff, e.g. state subsidy or tax). Regulation should also be adapted to the
shrinking asset base, studying the required network renewal and otherwise dismantling. The
NRA should also frame the discussion of the organisation of system operation at the
distribution level, considering both options, by the DSO itself or with a TSO expanding its
current activity to the distribution grid. Finally, the discussions related to the updates of
network codes are expected to be loosened since this scenario gives a broader role to the
local decision-making power.
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3.2.4 Comparing the interactions between the TSO and the other stakeholders the in the three
scenarios
The table below sums up the possible transformation of the interactions between the TSO
and the other stakeholders (DSOs, market participants and regulators) in the three
scenarios.
Scenarios
Interactions within a pan-European within existing Member within decentralised
between the system States systems systems
TSO and …
 For last resort
provision of
 Different possible
balancing + different
organisations
possible
between national
organisations
DSOs  As today DSOs & TSOs for
between national
system operation
DSOs & TSOs for
and connection
system operation
arrangements
and connection
arrangements
 Intensive interaction  Very limited (during
 Intensive interaction
Market participants through central event of last resort
through self-dispatch
dispatch balancing provision)
 No interaction with
 European-wide ACER  No interaction of
regulatory  Regulation adapted ACER
interaction through to investment wave  Cost-reflective tariff
ACER mainly  Cost-reflective tariff including impairment
Regulatory authorities  Regulation adapted applied both to load of stranded assets
to investment wave and generation  Framing discussion
 Cost-reflective tariff  Framing discussion for organisation of
applied both to load for organisation of distribution system
and generation distribution system operation
operation
Table 10: Interactions between the TSO and the other stakeholders in the three scenarios
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Interaction between the TSO and market participants should be intensive in the pan-
European and national scenarios, respectively centered on self-dispatch or on central
dispatch. To the contrary, interactions with market participants should be limited in the
decentralised scenario, except in extreme situations, as a last resort solution for balancing.
As a consequence, interactions with DSOs should also be more limited in the pan-European
and the decentralised scenario; while it should be intensive in the national scenario to guide
the TSO for establishing a framework for decentralised resources useful both to the
transmission and the distribution grids. As for regulation, the scope should be European in
the pan-European scenario and national otherwise. Besides, it should be adapted to the
investment wave on the transmission network in the pan-European and national scenarios.
Cost-reflectiveness should ground the new transmission tariff design in all the scenarios,
including the impairment of transmission stranded assets in the decentralised scenario. The
regulator should also frame the discussion for the organisation of a new distribution system
operation framework between the TSO and DSOs.
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4. The case for a “hybrid scenario” and the corresponding checkpoints for
an “Energy Union” low-carbon transmission framework
Introduction
The earlier chapters have demonstrated that the negotiations/proposals for the 3rd Package,
dating from 2006 to 2009, are no longer as relevant, because the system has irrevocably
changed and it cannot be implemented as it was first designed. The legal and regulatory
framework that we have today is mainly the one forecasted in the 3rd Package, although
implementation of this package is still a work in progress. However, with increasingly
ambitious new (national and EU) policies and innovative new technologies, the dynamics of
the power system have changed. While the hardware and the software of power systems are
evolving at an ever-faster pace, the legal and regulatory frameworks have not changed
significantly; hence, the gap between norms and incentives (“what should be done”), and
reality (“what is actually being done”), becomes untenable. Moving from the current “legacy
framework” towards a new setting (let’s call it a “2030” EU system vision) will be a long and
complex process.
It is essential for the successful evolution of the EU energy policy and EU power systems that
we identify and develop an understanding of this new terrain. As researchers and experts, we
chose to make the novelty more explicit, and easier to grasp, by investigating three
alternative scenarios concerning the evolution of power systems, assessing, for each
scenario, how key TSO functions would evolve. We want the reader to fully appreciate the
possible impact of structural changes upon the functioning of the power system, the functions
performed by different actors and overall governance.
Three conceptual scenarios are needed to identify and investigate the new factors at play in
the ongoing EU system change. They are:
1° “Full Europeanisation, but low decarbonisation” (a strong internal market is achieved, but
has not been conceived to deliver a strong energy transition and climate policy);
2° “High decarbonisation, but at national level” (within 28 Germanies or Great Britains);
3° “High decarbonisation, but at local level” (within thousands of “green autonomous zones”).
As shown above in Chapters 2 and 3, and summarised in Chapters 4.1 and 4.2 below, none
of these three scenarios is fully consistent with the present “legacy framework”, and they all
require substantial changes in terms of governance mechanisms and regulatory policies.
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The main goal of this research is not to recommend the best scenario of the EU TSOs future
from the perspective of European public interest, or to prescribe an ideal road map conducive
to an optimal European future.
The objective is more humble and more preliminary. It is to decipher how the European
power system might evolve; the TSOs tasks, constraints and environment; as this should
allow the reader to make their own conclusions of the best and worst aspects and how they
should be resolved.
It is also ambitious, as understanding the ongoing motivation for change in the power system
is imperative, both for the numerous interest groups and the various relevant institutional
players in the shaping of any successful EU policy. We would like our research to contribute
toward framing an “Energy Union” for the future of our power transmission.
In Chapter 4.3 we will consider the case of a fourth scenario, named “Hybrid”, because it
assembles various features from each of the three basic conceptual scenarios. Firstly, it is
unlikely that the EU can realise/achieve a fully European or a fully local system and
framework in the coming decade. But secondly, retaining a fully national framework seems
impossible given the overriding strength of the single market and its open borders, as well as
the unprecedented growth of distributed generation at local level. However, thirdly and finally,
it is not because “hybridation” is the solution that, in practice, will most likely work well and
easily deliver. In fact, on its own, it is full of holes and foreseeable contradictions... If we can
anticipate the evolution of the EU power system and TSOs, we can prepare for, and monitor,
each step towards our common future.
Aware of the drawbacks of “Hybridation” actually progressing in the EU, either “by design” or
“by accident”, Chapter 4.4 will examine at a set of “checkpoints” aimed at ensuring critical
levels of coherence, consistency and resilience along the energy system journey towards a
low-carbon future (say by 2050). We can only suggest how to begin this transition for the
coming decade. The process will inevitably be full of unexpected and surprising, good and
bad news. As we know little of yet, there is a high level of uncertainty around numerous
issues, making it vital to establish check-points to ensure the EU system can continue to
operate and implement EU policy during a process of trial and error. In particular, the
governance of both the DSOs and the TSOs will have to take strides to catch up with the
existing and numerous imminent transformations of the EU power system. From our current
perspective, the EU DSO is still in its infancy, while some progress has already been made
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with the EU TSO. Nevertheless, both would have to be fully mature by 2030: demanding a
serious catch-up.
4.1 Overview of the three conceptual scenarios
The three basic conceptual scenarios were introduced to better grasp some structural
novelties of the new world that we are entering into, and to identify major critical issues, as
described in the following table (See Table 11 next page).
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Market System Network governance Regulation
Decarbon.
Scenario
integrat.
market
structure operation (who is in charge of what?)
EU
European SO tools and markets Adapted to an investment wave for
More than today

EU-wide
Europeanised
European
competition of with EU wide and/or EU regional (mainly cross-border) transmission; better
Missed
cross-border cost allocation; supervision

Fully
and
ISO(s)
A
centralised of complex supra-national markets and

national system operation. EU regulator needed,
resources
as well as coordination with NRA.
Competing TSO managing T grid

Adapted to an investment wave for
decarbonisation
centralised National (mainly national) transmission, T-D

Achieved
As today
National
DSOs managing D grids

and and interfaces and smart grids; local markets
B
design; rules for coordination between

decentralised local + T-D coordination needed for
local and national markets and system
resources cross-network externality operation.
decarbonisation
Less than today
Adapted to an investment wave for mainly

TSO for last resort actions smart grids ; local markets design and
Achieved
Mostly local Mostly

(balancing or blackstart) in their coordination; rules for coordination
Local
C
resources local between local and national markets and

national scope system operation handling of potential T
and D stranded assets.
Table 11: Overview of the main structural, governance and regulatory characteristics of the three basic conceptual scenarios
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4.1.1 A) A scenario of “full Europeanisation but low decarbonisation”
The following table sums up the transformation of the transmission system operation in a
scenario of full Europeanisation, but low decarbonisation. It is assumed that there will be a
very strong and open internal market, which will dictate/shape the operation and level of
investment. The key characteristic of this market structure is EU-wide competition among
“centralised” generation resources. In order to ensure the reliability and efficiency of such a
large-scale unified system and market, the current trend towards a European system
operation, meaning both (analytical, forecasting) computations and (control) actions at EU
level, must be reinforced. From the organisational point of view, this can be achieved through
the creation of either a single European ISO coordinating all TSOs, or a European system
operator chairing a pool of regional ISOs. The regulatory framework needs to cope with a
wave of EU transmission investments, providing the right incentives and allocating its costs to
beneficiaries in a transparent and acceptable manner. The creation of a truly European
energy regulator to supervise supra-national markets and all forms of cross-border
transactions (energy trade, “green” electricity exchanges, provision of ancillary services, etc.)
becomes inevitable, in spite of all the political and institutional difficulties. The institutional
interface between this new body and national regulatory authorities also needs to be
established.
While this scenario would materialise the “old” internal market model, it is most unlikely that it
would deliver the expected results of the current EU energy transition and climate policy,
because it ignores the ongoing decentralised green revolution, abandoning all innovations
that do not fit the centralised approach.
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The scenario
Entity in charge
Function
today
Function scope Entity in charge
Operation TSO ISO(s)

Adapted to centralised and "flexibilised"
Connection
Involvement in rules Mostly TSO + RES resources
Mostly ISO(s) + DSOs
design DSOs
Higher (cross-border) investment and
Network investment TSO TOs
use of innovative grid technologies
Operation TSO
ICT
investment Involvement in rules
TSOs Momentum of current arrangements
design Enhanced ISO bodies going
(grid codes)
beyond (ENTSOE, RSCIs,
Operation TSO + Harmonisation of bal. and res. mkt
Sys. & market GCCs) but national TOs for
but no finer time & space E & R products
operation Involvement in rules investment
TSOs Need of EU capacity market?
design
TSO coordination TSOs

Table 12: TSO functions transformation in scenario A - full Europeanisation but low decarbonisation
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4.1.2 B) A scenario of national decarbonisation
The table that follows sums up the transformation of the transmission system operation in the
case of a Member States’ driven decarbonisation. The Member States fully mobilise their
political, legislative, regulatory and economic resources in a strong decarbonisation process
without the significant Europeanisation of electricity systems and markets. In each Member
State centralised and decentralised generation resources co-exist. The system operation is
still mainly conceived and carried out at national level, but with a growing need for
coordination between DSOs and TSOs. The same applies to a market redesign, where
“local” and “national” platforms must be compatible, thus requiring considerable
harmonisation efforts at national level. Governance issues are mainly addressed at national
level, leading to potentially very different market and operational architectures across the EU
Member States.
The regulatory framework must be adapted to incentivise, for both types of system operators,
the necessary investments, and to establish formal cooperation and coordination
mechanisms from the grids planning stage to actual flow operation. Local markets may be
more or less regulated, but national regulatory authorities must define or approve rules
concerning all kind of transactions between the local and national levels (energy trade,
“green” electricity exchanges, the provision of ancillary services, etc.).
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The scenario
Entity in charge
Function
today
Operation TSO DSO

Expanding toward distribution & adapting
Connection
to new decentralised sources
Mostly TSO +
Involvement in rules design Mostly TSO + DSOs
DSOs
Higher investment and more use of

Network investment TSO TSO
innovative grid technologies
Operation DSOs
ICT
investment
Involvement in rules design
Adapting to new decentralised sources
TSO
Finer time & space E & R products + TSO-DSO coordination needed for
Operation
cross-network T-D externality
Sys. & market
operation
Involvement in rules design
Lacking integrated reserves, balancing &

TSOs in current EU arrangements
TSO coordination TSOs intraday markets for European flexible
momentum
resources integration
Table 13: TSO functions transformation in scenario B - Member States driven national decarbonisation
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4.1.3 C) A scenario of deeply local decarbonisation
The following table summarises the transformation of the transmission system operation in a
local decarbonisation scenario. In a context of sharply declining costs and plenty of
technological and societal innovations, the offer and demand of low-carbon energy systems
meet in reduced size sets of strongly interactive devices and behaviours. The European and
national power markets have lost their central role. Hundreds (or thousands) of local systems
have been organised or built. DSOs or new intermediaries (being private ones with
contracted services; or public ones supported by local authorities) operate all these systems,
which extensively use local storage and local balancing to run autonomous small power
systems, some of them strongly interconnected with other energy systems (heating, cooling,
gas, mobility, etc.).
TSOs subsist with their infrastructures and tools, most of them accepted as “sunk costs” from
the past. They still play a role - but limited to what central resources can deliver in a
fragmented decentralised low-carbon world.
From the governance point of view, ensuring proper coordination among a large number of
quasi-autonomous systems, including both normal and abnormal system conditions,
represents a formidable challenge.
The regulatory framework has lost a significant part of its substance as these local systems
are much more “self-regulated” than traditional centralised (national) systems. However,
regulation must address the definition and implementation of distribution network tariffs with
the high decentralisation of agents, “random” transactions and potentially high stranded
costs. Furthermore, interactions among agents from different local systems must be
regulated, in addition to the provision of “back-up” services. An important part of the new
regulatory framework is the management of many “stranded assets”, the definition of a new
class of actions for the TSOs within new incentive and cost allocation schemes.
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The scenario
Entity in charge
Function
today
Operation TSO DSO

Connection Shifting from T to D
Involvement in rules
Mostly TSO + DSOs Sharing DSOs / TSO??
design
Network investment TSO Shrinking with only partial renewal TSO
Operation TSO DSOs

ICT
Expanding toward distribution
investment Involvement in rules
TSO Sharing DSOs / TSO??
design
DSO + TSO for last resort
System & Operation TSO Shifting from transmission to balancing
market distribution & adapting to
operation Involvement in rules decentralised sources
TSO Sharing DSOs / TSO??
design
Transnational imbalance TSOs in momentum of current EU
TSO coordination TSOs
mutualisation arrangements
Table 14: TSO functions transformation in scenario C - local decarbonisation
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4.2 Consistency and feasibility of the three basic scenarios
After having analysed in detail each one of the three basic scenarios, two main
questions arise:
- Are the scenarios consistent? (i.e., are they able to deliver what a society
expects from the energy transition, namely decarbonisation and the
Europeanisation of electricity markets?)
- Are the scenarios feasible? (i.e., is each scenario self-consistent, or does it
contain incoherent features that render the system potentially unreliable or
unstable?)
Although all three scenarios were constructed in order to fulfil EU energy and climate
policy objectives, no individual scenario can easily fully meet all of the goals at a
reasonable cost. Societal expectations, technological developments and public
policies are not necessarily, and not always, aligned, therefore this difficulty should
be of no surprise.
As regards their internal coherence or self-consistency, it should be pointed out that

implementation of any scenario requires substantial changes in the current legal and
regulatory frameworks. In particular, two points deserve special attention:
1) Some critical system operational functions, currently mainly performed by

national TSOs, will be totally or partially performed by other entities. These
entities may be supra-national organizations, either emanating from or acting
in close cooperation with TSOs, DSOs (individually or somehow associated)
or even new players. Therefore, the legal and regulatory frameworks must be
adapted, namely in order to:
i) Clearly define and assign each system operational function, indicating, for
each, appropriate cost and liability sharing mechanisms.
ii) Establish appropriate coordination mechanisms, for both normal and
abnormal situations, including appropriate redundancy safeguards and
supervision tools.
2) Even if from the technical (system operation) point of view it is theoretically

possible to ensure appropriate system reliability (assuming that the necessary
legal and regulatory changes are implemented), several “black holes” may
still jeopardize the efficient functioning of electricity systems and markets. The
report discusses how to patch them.
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Table 15 describes both the major “black holes” that need to be patched up and the
main expected transfers at system operation level.
Performable TSO Black holes to patch up

TSO functions
Scenario
functions? performed
by
Yes ISOs for Where’s the EU wide real regulator? How to

software communicate with NRAs?
National decarbonisation Fully European
& TOs for

Liabilities in case of critical situation where the
hardware
computation / action sharing of liabilities is not
robust  mutualisation toward EU ISO /TO
bodies?
Yes TSO & DSOs Coordination arrangement to be built in order to

handle cross network externality
3 solutions
Extending SO by TSO toward D
Enhancing SO by DSO with communication
with the TSO
TSO-DSO joint Security Cooperation Initiative
Yes DSOs How regulation can be fair & reliable if different

developing market models pop up at local level?
decarbonisation
similar skills
Liabilities in case of critical situation between
as TSOs
DSOs and TSO  TSO as a mutualisation
today
body for a critical situation?
Local
Table 15: Scenarios consistency check
1° In a fully Europeanised system, the companies invested in grid infrastructures are

still alive and cannot be deprived of their assets. They may lose their rights on the
“System Operation”, which is a statutory role given by legislation and regulation. They
then become “Transmission Owners” (TOs) while the grids are operated by new
entities created under the model of “Independent System Operators” (ISOs). On the
hardware part of the European grid, it is unclear how the transmission investments
are conceived, planned and made; financed and allocated to users through tariffs or
prices for services. On the software part of the European grid, how will the
coexistence of several layers of grids (the proper EU “super grid”; the several regional
transmission zones; the remaining national and sub-national sub-systems) work?
What will be the definition of responsibility and liability if the computation of the
system operation, and the requisite actions to be undertaken, are indistinct and
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clearly non-competitive?? What type of rights or duties will be given to the regional
operators by the Member States?
2° In a national decarbonisation scenario, the role of the DSOs will inevitably grow
because low-carbon energy will not be fully centralised, even if the central types of
bio-mass, bio-fuels, bio-gas, off-shore grids (etc., such as nuclear) will play a big role.
How will this come to life? Might TSOs keep the bulk of their current functions and
finally extend them to distribution operation? Or will DSOs increasingly push for a
combined DSO and TSO power to negotiate and enforce detailed protocols of
coordination and cooperation? Will we see more and more “TSO-DSO joint Security
Cooperation Initiatives”?
3° Inevitably, in a local decarbonisation scenario, DSOs will become “small TSOs”,

leading to four questions. Firstly, the transmission grid will still be able to link, and to
bridge, many or most of the local zones of operation. How, then, will the proper role
and the system responsibilities of the TSO be defined? Secondly, what will happen to
the “voluntarily fully autarchic” local zones when confronted with the unexpected
ruptures of their self-sufficiency? Thirdly, how will DSOs manage the interactions of
their numerous local zones at their many common borders? Fourthly, in a scenario of
radical decentralisation, many micro-grids owners and operators will not be DSOs, but
private or local public undertakings. How will these interact with the DSOs or the TSO
if they act outside of the DSO and TSO regulatory framework?
4.3 The case for a “Hybrid scenario”
We will now consider the case for a fourth scenario, named “Hybrid”, because it
assembles various features from each of the three conceptual scenarios previously
analysed. What makes a “Hybrid” scenario likely? And is this hybridation a magic
bullet, or rather a mere contradiction? Will hybridation happen “by design” (i.e.,
because decision-makers consciously opt for a hybrid model) or “by accident” (i.e.,
because decisions being taken by different agents at different places and at different
points in time result in a dynamic hybrid outcome that does not correspond to the
expected outcome of any individual agent)?
4.3.1 Is there any “hybrid” scenario to regroup the best of all three conceptual worlds?
All three conceptual scenarios previously analysed have weak points; but two of
them (A and C - the EU and the local) show serious feasibility difficulties, which make
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the “MS national” scenario the more realistic option in a “conservative” approach to
the EU energy transition (i.e., taking into account current institutional inertia).
a- Hardware feasibility: The existing method for EU generation cannot be fully

localised or fully Europeanised in the course of ten years. The grids themselves
cannot be transitioned within this time frame. Thus, a longer period of time is
necessary to achieve a fully decentralised or fully European set-up. Any transition will
presumably be a protracted process, during which the “hardware” functions of the EU
power system will remain “hybrid”.
b- Software feasibility: a full reallocation of most of the “system operation”

responsibilities (both data and processing tools, plus full control or decision making)
to fully European players or fully local (being existing DSOs or new local “micro grids
operators”) in a decade is not more realistic. On the one hand, full Europeanisation
would involve challenging the strength of existing MS transmission operation
frameworks (as the duly legal and regulatory frameworks for system operation). On
the other hand, the full decentralisation of the system operation would involve dealing
with the weaknesses (operational tools; professional skills; assets and resources) of
new players, not the existing TSOs. Any transition will be a lengthy and difficult
process because both the framework for operation and the capabilities to operate will
long resist a full or speedy transformation.
4.3.2 While the “MS national” scenario is less hypothetical, it has serious weaknesses
a- Full “nationalisation” of the hardware functions is not realistic because, on the one
hand, distributed generation at local level is already substantial in many countries
while, on the other hand, interactions between national systems are high enough to
push TSOs into a real “hardware dialogue” (see how much the Nordics and the
Benelux are building new cross-border lines; or the new France-Italy 1bn euro link
under the Alps).
b- Full “nationalisation” of the software functions is not any more realistic. On the one
hand, there is already considerable Europeanisation of the market operation in
several countries, and cooperation between TSOs has already followed (think
ENTSO-E, RCSIs, TSC, Coreso). On the other hand, the European Commission has
serious weapons to impede a full “renationalisation” by MS. This arsenal includes the
Commission’s “Internal Market” and “State Aid” powers (see, for instance, the new
sector enquiry on “Generation Capacity mechanisms” launched at the end of April
2015).
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4.3.3 The three conceptual scenarios are more conceptual than actual
It is not a surprise that the three conceptual scenarios are more conceptual than
actual. But, it doesn’t necessarily mean that any hybrid option is a better option or
“more realistic”. It may be that hybridation has certain good properties “per se”; be
they economic, technological or systemic. Hybridation might permit a better use of the
various low-carbon resources of the EU (from biomass and PV to onshore and
offshore wind). Hybridation might keep options open and allow for the gradual
discovery and experimentation of new ways of generating power, operating grids and
using markets, even new means of efficiently consuming energy.
4.3.4 Conceptually, hybridation is mainly a phase of difficulty and transition
However, there are also obviously strong contradictions and major drawbacks to
hybridation. The co-existence of three levels of system hardware and software
inevitably raises conflicts and contradictions. These three levels do not require the
same set of rules, nor the same roles, for the same governance to enforce these rules
reasonably well. This is a big concern, and decision-makers should be fully aware of
this fact and prepared to respond to it.
While nobody yet knows which system we will end up with by 2030, we already know
that it won’t be that referenced in the 3rd EU Package. Regardless of whether
“hybridation” is the more likely scenario, it will not be an easy solution, either in its
implementation or delivery, as the process is full of holes and contradictions.
4.3.5 Towards an EU Regulation 2.0.
Our existing EU regulatory frame is questioned both at its top and at its bottom.
At its top we do not find yet the robust Europeanized frame corresponding to the
cross-border system and cross-border markets that are expanding. One expects a
deeper regional coordination for grid planning and system operation as well as open
market platforms for intra-day and balancing. This also implies an effective cross-
border frame for grid and system costs-benefits analysis, costs allocation and
revenues collection; if not for financing and building. Hence a really Europeanized (or
regionalized) regulatory frame.
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At the bottom of the existing EU regulatory frame we do not find yet a coherent
response to the convergence of low carbon objectives and wave of innovation. Most
of the national regulatory frames do not have yet reorganized for distributed
generation, demand response and smart technologies. With presumably less grid
traffic to come but more services to deliver, less revenue certainty but new investment
to be made, and more trade-offs between capital and operation expenditures (Capex
vs Opex), the whole architecture of network regulation has to be rethought and
reviewed. It goes up to create a brand new regulatory frame for brand new
interactions between transmission grids and distributions grids, national system and
local systems.
Between this more Europeanized top and this more local bottom the regulation for
security of supply has to move and to catch up. More distributed and more
intermittent generation resources ask for new system rules, with less “socialization”,
more responsibility for players (incl. for demand), and finer localisation and time
definitions of products, prices and actions. The adequacy of the generation set might
even not be guaranteed anymore in energy markets transformed by massive RES
integration. However one does not expect a robust pricing of system flexibility or an
efficient capacity market to be built without a clear regulation of reliability standards,
of cross-border contracting and activation of capacity related services.
And, at the end of this wide EU-local loop, it is the resulting menu of grid access and
tariffs, services definition and revenues opportunities which will create the incentives
for a long wave of low-carbon investments and technology innovation (see IEA 2015).
4.4 Checkpoints for the launching of an “Energy Union” system and “grid
framework”
All of the limitations, deficiencies and contradictions observed in any scenario,

including “hybridation”, call for a set of checkpoints to facilitate the coming “Energy
Union” and make the best of existing limits and constraints. A set of relevant
checkpoints should advance the process of full decarbonisation, and ensure
successful EU integration within a relatively secure power system, toward a long-
lasting “Energy Union”.
We will start our recommendations by looking at the “primary checkpoints”, targeting

the likely properties of an EU hybrid scenario which could conflict with the main goals
of the EU policy (being 1° an open internal market; 2° secure power system; 3° low-
118
carbon and high level innovation). In the second part, we will look at the “secondary
checkpoints”, relating to governance issues.
a/ Primary checkpoints: a matrix with “Three dimensions and Two channels”
Our primary checkpoints aim at keeping control of the key properties deemed
necessary for the internal market, and for the power system, on the long road toward
an EU energy transition. There are three dimensions of “EU policy” at stake there .
and each is questioned by the new properties of the power system and market:
- First, to keep an open and unbiased internal market where players can easily enter,
act, invest, operate, innovate and move across the EU.
-Second, to protect the security of the power system: the reliability of its operation and
the adequacy of its structural evolution.
- Third, and last but not least, to favour a low-carbon trajectory and the necessary
corresponding technological wave of innovation.
Having already identified two channels of power transmission grid functions (noted in
previous chapters as the hardware’s functions and the software’s functions) at work,
and having added the three key EU policy dimensions at stake, we end up with a
table of recommended checkpoints, being a matrix of 2 lines for the two channels of
grid functions and 3 columns for the three dimensions of the system and market, as
illustrated in the table below.
EU policy goals
Network functions
Open internal market Secure power system low-carbon and high
level of innovation
Hardware
Software
Table 16: Primary checkpoints
b/ Secondary checkpoints: the Governance issues
Our recommended Energy Union checkpoints also cover a set of governance issues.
The primary checkpoints, as referred to above, are not providing a fully defined, fully
implementable and non-ambiguous set of rules and actions according to each
possible state of the EU system, market and environment. Good and bad surprises
will occur, to some extent. Therefore, the primary recommended checkpoints have to
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be completed by secondary “governance checkpoints”, which anticipate the
institutional control keys for the stakeholders’ interactions in the process of aligning
actions and rules to a shifting reality.
Since three distinct operational levels must be considered (local, national and EU),
the above described checkpoints must be applied at each interface between them.
Figure 18 shows these interfaces and indicates the Sections where the respective
analysis will be performed.
LOCAL
EU 4.4.2 NATIONAL
Fig. 18: Critical Interfaces
4.4.1 Recommended checkpoints to better articulate the local level with the national
level vis-à-vis the three main EU policy goals
In any hybrid scenario, the local and the national levels co-exist. One may think of the
communication between them as a purely “subsidiarity matter”. And this is mainly true
from a restrictive “governance” point of view: institutionally the local interacts with and
reports at MS level and not at an EU level. However, this does little to alleviate
concerns of a de facto “hybrid” scenario for an “EU system and market” policy.
Subsidiarity is a key European principle because all subsidiarity affairs are assumed
to be of no fundamental impact on the EU policy, power system and market. This
strong “neutrality” principle between the local and the European has to be monitored.
This would be particularly important if any type of articulation between local and
national levels was also reasonably EU internal market friendly, plus resilient enough
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vis-à-vis system reliability and adequacy, and favourable enough to low-carbon
transition and technological innovation. This neutrality is far from being granted in the
practice of existing hybridation because of serious contradictions that grow, or can
grow, between the local and the national MS levels.
Of course, it is not the task of the European level to select what best suits the
trajectory of each Member State. But, as independent experts and researchers, we
have to flag the areas where the Energy Union would need safeguards. It is there to
favour minimal consistency and the robustness of local scenarios vis-à-vis the MS
national “2030” trajectories. These national trajectories will be given by the MS as
“building blocks” toward the EU level “2030 trajectory”. Here lies one of the big
gambles of the growing hybrid EU power system: change happens quickly and widely
at the local level; where only national authorities and national frameworks can keep
the playing/game open enough, secure enough and innovative enough for the EU
common interest.
a- Internal Market dimension
On the hardware side of grid functions (grid investments and connections), coherence
between DSOs and TSO(s) is not yet given. The information relevant for grid
planning, the way DSOs and TSOs define formats and the protocols of information
gathering and information exchange would have to become consistent and
interoperable. The same seems necessary to give reciprocal consistency to the
DSOs/TSOs respective grid planning methodologies and system scenarios.
On the software side (operation and interactions), we could fear a wave of foreclosure
of the mushrooming local markets by local incumbents and / or integrated national
companies. What safeguards should be implemented to keep local affairs open? A
similarly workable gateway, and interoperability, would be welcome between the
operation of the local markets and systems and the national ones. If none is provided,
a deep fragmentation and balkanisation of the EU system and market could be
voluntarily, and quietly, built at the local level: where the EU level cannot act or react.
There is a major tension there. Economists would call it a “trade-off” between the
respected and required autonomy to choose and experiment at local level, and the
threat of an easy foreclosure by local cartels, monopolists or dominant players.
b- Reliability and Adequacy dimension
On the hardware side of grid functions (grid investments and connections), we also
find a real issue. For the past few years, most of the new generation capacity
investment has been made at the distribution level, while interactions between this
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new RES generation set and the rest of the system occur via the transmission grid. A
minimum of consistency should come for the format and the protocols of information
gathering and exchange between the DSOs and TSOs. A similar move could give
consistency to the DSOs/TSOs respective grid planning methodologies and system
scenarios. Why should MS policy care that much about generation adequacy and grid
adequacy at each MS national level, if neither is checked at the MS local level to see
if it is already deeply influencing the MS national level outcome?
On the software side (operation and interactions), the national security of the system
operation relies more and more on distributed generation behaviour and the
responsiveness to the local and national system needs. Again, one could expect a
definition of the respective roles and responsibilities (rights and duties; actions and
liabilities) of DSOs and TSOs (as for: information and monitoring standards;
congestion management; balancing procurement; emergency handling; etc.).
c- The Low Carbon and Technological Wave dimension
On the hardware side of the grid functions (grid investments and connections), we
hope that more and more low-carbon, energy efficient or system responsive
innovations and novelties will appear and grow at the local level; either for distributed
generation, or consumers behaviour, or both (“prosumers”). A main concern, for the
success of this awaited wave, is to retain the scope and scale of incentives for
economies, which can be gained at national level. This suggests that DSOs should
ensure a minimum of technology pluralism and grid user neutrality in their grid
planning and connections (both for methodology and implementation).
On the software side (operation and interactions), a similar concern to “keep locals
open to changes and novelties” suggests finding safeguards against the worst
scenario, that “existing suppliers or integrated companies take all and pick
themselves as winners”. It would also be welcome to get at local level a pro-active
demand activation enabling.
4.4.2 Recommended primary checkpoints to better articulate the national level with the
EU level, vis-à-vis the three main EU policy goals
In any hybrid scenario, the national and the EU levels co-exist. This topic is familiar
because it is the enduring story of building the internal market since the Single Act in
1986. As there are at least three dimensions of interest there (= internal market;
reliability and adequacy; low-carbon and a technological wave), one cannot expect to
find the same single combination of these three dimensions in each and every EU
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country. However, each of these three dimensions has a strong EU common interest
and none can be fully disregarded as purely of “national choice and MS sovereignty”.
On the hardware side of grid functions (grid investments & connections), the way MS
TSOs plan and build their grids shapes the way the infrastructure of the EU internal
market is framed or constrained. The EU internal market should reach an EU level
playing field, as with: an open TSO data base; explicitly interoperable system
scenarios and analysis; joint projects suppressing the border seams between
adjacent TSOs zones etc. For the transmission connections, one could expect a
harmonised and transparent set of connection options, and price calculation
harmonisation (=i.e., not the same price everywhere, but everywhere a consistent
logic in the pricing of connection options).
On the software side (operation and interactions), one could expect a coordinated
management of the interdependence between the national system and market zones.
A coordinated approach to the system operation, to maximise the benefits delivered
by the internal market, is needed. Hence, one expects regional sets of: forecast,
capacity calculation, and a menu of potential actions, as well as a regional approach
to an efficient zoning of grids and the operation of markets. In the same vein, one
should deliver a regional approach to enhanced RES integration, system flexibility
maturity, demand response enabling, etc.
On the hardware side of grid functions (grid investments & connections), one expects
the same as above for planning (an EU level playing field for: an open data base;
explicitly interoperable system scenarios and analysis; etc.) to get greater consistency
between interdependent TSOs. It should go to a regional approach to grid planning,
as to a regional monitoring of the MS’ Security of Supply infrastructure planning
consistency.
On the software side (operation and interactions), one would expect deeper
coordination of the TSOs as; regional assessment of generation adequacy, security of
supply and the handling of “emergency” scenarios, as well as regional arrangements
to increase system flexibility and responsiveness both for supply and for demand. As
national TSOs control zones are still kept as a core of system operation, a deep
harmonisation of the TSOs’ behaviour and tools is needed. The handling of intraday,
balancing and reserves has to converge between adjacent TSOs; the products,
certification, activation and trade rules etc. have to be harmonised.
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c- Low Carbon & Technological Wave dimension
On the hardware side of grid functions (grid investments and connections), it is

important to understand how national TSOs conceive of their “tool-box”, and how they
build their contributions to MS policy targets and 2030 trajectories. It could come via
transparency by revealing “low-carbon” assumptions made by TSOs in their system
scenarios and grid planning. It could also act as voluntary guide lines for technology
plurality for the connections &and users; sustained by ex-ante transparency for the
connection charges calculation. Another way could be the TSOs defining KPIs (“Key
Performance Indicators”), permitting to follow, ex post, the contribution of the national
transmission grids to the MS trajectories within the National Action Plan(s).
On the software side (operation and interactions), we would welcome safeguards for
technology pluralism and users neutrality. This welcome would extend to a pro-active
demand system enabling role.
4.4.3 Recommended checkpoints to better articulate the EU level with the local level
How could the EU level address anything legitimate or relevant for the local level to
achieve a common EU interest? It is, of course, a quite irritating question for many EU
citizens and authorities. The EU level is no more than the EU level; and each
European is better off when choosing locally what to eat at breakfast (as at lunch…).
However, it is well known why we ended up with EU common rules for fishing or
hunting endangered species, as well as why the “EU” frames the MS action vis-à-vis
the basic freedom of any EU citizen or undertaking to move and exist inside the EU. It
is because logically a local action principle cannot significantly jeopardise a
fundamental principle having being legally established at a higher level (in this case,
at EU level).
We have identified three of these “fundamental principles” at the EU energy level: 1°

openness and non-discrimination in the internal market; 2° reliability and adequacy of
the power system; 3° the effective twinning of low-carbon action within a technological
and innovation wave. The aim, here, is not European harmonisation, as such.
Europeans prize and value local actions; so they can freely deviate, differentiate or
ignore each other. Nothing wrong: very welcome. The only EU aim, should be asking
for a minimal level of consistency with the highest EU common interest, for people
building the frameworks for local actions. Any kind of national guidelines or voluntary
“Convenant of Mayors” could look at how the welcome autonomy and diversity in
local actions does not derail into systematically killing any common targeting, or
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common interest, expressed at EU level. This aim is minimalist by nature: it calls
mainly for some safeguards or voluntary limits.
On the hardware side of grid functions (grid investments and connections), initiatives
could be taken to favour guidelines or codes of conduct defining what is friendly/
unfriendly to the internal market in the planning and connection principles used by
local grids for their corresponding “pocket markets”. A key debate is if “purely closed
shop” micro-grids (as a “mall”, an “industry park”, a “university research park”, a
“municipal collective housing”, etc.) could escape those principles. Such a debate, to
better know what is, and isn’t, at stake is necessary and urgent.
On the software side (operation and interactions), there are similar concerns and
hopes. Could voluntary guidelines or commitments define the “internal market”
friendly operation principles for local grids and pocket markets? Initiatives looking to
be consistent with the coming “Advanced EU Target Model”, expected to be working
in 2020, are necessary.
On the hardware side of grid functions (grid investments and connections), the
growing importance of distributed generation makes the EU power system tremble in
its roots: the local grids. One would give the whole EU tree more stability and
resilience by establishing a minimal coherence and interoperability of local
information data-base, data processing and access. It might also help to provide
some visibility or sharing of the actual planning methods and developing the system
scenarios.
On the software side (operation and interactions), the not very positive role played by
some distribution grids in the 2006 EU blackout management cannot be ignored. And,
at that time, the local generation set was not at all what it has become. Medium-size
cities’ airports do not self-manage their skies because there, at local level, some of
what has been already said is needed: coherence, interoperability, openness…
Working definitions of local grid players’ roles, responsibility, rights, duties, liabilities
etc. for congestion, balancing, emergency etc. are urgently needed.
c- The Low Carbon and Technological Wave dimension
On the hardware side of grid functions (grid investments and connections), it is

important to understand how local players operate in the common journey toward
energy transition. It might be some way of revealing the “low-carbon” assumptions for
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system scenarios and grid planning. It could also go toward ex ante transparency for
the calculation of connection charges within technology plurality for connections and
users. Advanced DSOs might also define their own KPIs (“Key Performance
Indicators”) permitting us to follow their role in the MS trajectory(ies) revealed by the
National Action Plan(s). Local players should be interested in showing how their
investments structure the common manoeuvre against climate change and for smart
energy systems.
On the software side (operation and interactions), the EU expected wave of low-
carbon, energy efficient and responsive innovation might benefit from voluntary
safeguards for technology pluralism and user neutrality; as well as a pro-active
demand system enabling role.
The Governance issues
The set of “primary” checkpoints proposed above do not guarantee a smooth energy
transition for the coming decades (say 2020-2050). Only the opposite can be
guaranteed: they will not be sufficient. They only offer a framework to begin this
transition, which will inevitably be full of uncertainty, surprises, incredible errors and
unexpected lucky strikes.
It is why these primary checkpoints have to be complemented by secondary ones.

They are a matter of “governance” (i.e. the “definition of roles”). Proper governance is
what would help to organise the interactions of the energy system stakeholders in the
discovery process of better implementation / adaptation of the primary rules. Of
course, here or there, a deeper shake up or rupture of the primary rules will also
occur in the future. Therefore, the established governance itself will be questioned, at
times, by earthquakes and tornadoes (the authors hope that “no tsunami” will ever
happen in the EU…).
To be realistic, the existing EU governance set-up cannot easily remedy a strong

deficiency with primary rules. First, it is impossible to create a “governance
framework”, which simultaneously works perfectly well at EU, MS and local levels.
The process by which governance is created at each of these three levels is not and
will never be coordinated, coherent and unified. We will forever live in a “multi-level”
world of governance. Second, the process by which rules are defined, enacted and
adapted is, itself, at least as fragmented (if not more) than the process of building
governance. It is very difficult to match the two processes of rule making and
governance building. Third, many forms of EU governance (notably forums,
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committees, consultations; etc.) have no effective decision making process: too many
veto rights and then bargaining strategies that are too strong. They also lack clearly
binding implementation principles with no direct delegation of power to a responsible
‘Managing Third Party’. Thus is European life. We lived with this, from the Single Act
(1986) to the 1st energy Package (1996). No doubt, the Energy Union will again find a
way of going ahead with our baroque framework for EU governance.
Nevertheless, as recently expressed by the departing head of ENTSOE (and of the

National Grid): “Yes, we know it looks quite baroque there, in the EU, but. But
nowhere in the world had anyone done more than the EU for establishing a gigantic-
scale open market for power”. Let’s hope that we will make it –again- “just workable
enough” to better combining our internal market, our reliability and adequacy, with a
low-carbon trajectory and a wave of innovation.
4.4.4 Secondary checkpoints for better governance between the local and the national
level
As already stated, in any hybrid scenario the local and the national levels co-exist.
One may think that the articulation between them is a purely “subsidiarity matter”. It is
not very likely, as most of the expected wave of investments, changes and innovation
should be located at this local level. And then, all the new dynamics of the MS policy,
system and markets could end up located at this level and be transmitted throughout
the EU via the national MS level. In this setting, they indicate the quality and the
robustness of the link between the local and the MS levels, which become the key
factor of success for each MS 2030 trajectory expressed in MS NAPs. All MS being
aggregated, these NAPs will also be producing the whole –right or wrong-trajectory of
the EU policy, system and market.
It is, hence, the duty of independent EU experts and researchers to share what they
see as offering a more open and more robust governance of the many possible local
trajectories of energy transition within the proper MS national trajectories.
On the hardware side of grid functions (grid investments and connections), the main
concern is to continue the expansion of local grids, providing access and connection
to the national markets (and beyond: the European). It is legitimate for “fully private”
grid undertakings (we mean: really autarchic and closed “microgrids”) to refuse to
give access to their own set of system resources. When there is no “essential facility”
acting as a “natural monopoly” vis-à-vis third parties, there is no mandate for “Third
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Party Access”. However, this will never be the case with each and every regulated
DSO. All DSOs are “statutory entities” managing “franchised monopolies”, and then
have an obligation to offer a reasonable two-way access between their local system
and the national one. This suggests thinking about the following arrangements. 1°:
looking for a structural guarantee of independence and neutrality of the DSOs in a full
unbundling from all suppliers. 2°: opening dialogue and consultation at the national
level between DSOs, TSOs, NRAs and categories of grid users to follow the state and
evolution of “access and connection issues” between the local systems and the
national ones; and making recommendations of improvements. Various new forms of
DSO governance, at national level, could be explored as: the national DSO body; a
joint committee of transmission and distribution grid operators; DSOs voluntary task
force; DSOs initiatives; etc. The NRAs will control the accuracy of the outcome.
On the software side (operation and interactions), given the small individual size of
“pocket markets” and their cumulative part within the national market guarantees the
DSOs’ neutrality and openness in a full unbundling from any supplier are also
necessary. One also needs a dialogue at national level between the DSOs, TSOs,
Regulators and Third Parties to look at workable regulatory frameworks guaranteeing
access, openness, technology plurality and users neutrality in the operation of local
grids and pocket markets. Again, the NRAs should keep control of the accuracy of the
outcome.
On the hardware side of grid functions (grid investments and connections), the
growing interactions between DSOs and TSOs have to be better addressed by
enlightened forms of cooperative governance at the national level. It could lead to the
emergence of national principles of harmonisation, or “good practices” for local grids
planning and connection principles. National dialogues between DSOs, TSOs and
NRAS can go toward enhancing coordination of the transmission and distribution in
grid planning and connection principles; under the umbrella of the NRAs’ content
checking.
On the software side (operation and interactions), DSOs, TSOs, NRAs and Third
Parties need to clarify and better define the respective system and market
responsibilities of the DSOs and TSOs in the management of reliability and adequacy
(as: information and monitoring standards; ownership and access to data; congestion;
balancing (including the definition of products); emergency; etc.). All of this should
again be conducted under the supervision of the NRA.
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c- Low Carbon and Technological Wave dimension
On the hardware side of grid functions (grid investments and connections), more
explicit links between the local “hardware” functions and the low-carbon and
innovation trajectory, defined at national level, are needed. Might advanced DSOs be
encouraged to define their own “low-carbon” friendly and “innovation friendly” best
practice or code of conduct? Could it stretch as far as pencilling local networks KPIs
logically consistent with a follow-up of each kind of National Action Plan 2020-2030?
This matter could also be in the realm of NRAs or the Government, or any other
national relevant entity.
On the software side (operation and interactions), it is necessary to achieve a similar

approach for new forms of governance addressing principles of local grids operation
which are low-carbon friendly, technologically pluralist and its users neutral, and
logically consistent with the main trajectory of the national action plans. As earlier
noted, many different forms of governance of DSOs may be explored, such as: the
national DSO body; the joint committee of grid operators; DSOs voluntary task force;
advanced DSOs initiatives; etc. This will most likely be considered as the NRAs
duties, but not in every MS.
4.4.5 Secondary checkpoints for better governance between the national and the EU
level
Assuming that, in the short-term, implementation of 3rd Package legislation and

associated Network Codes will continue and no new legislation will be issued, a core
governance issue between the national (the MS) and the European levels is the one
of a full and deeper Europeanisation “à la Third Package” for the transmission grids
and related power markets facilitation. This issue has at least three different
dimensions being - from the softest to the hardest:
1° TSOs information, data, calculation, analysis, proposals;
2° TSOs decisions, actions, responsibility and liabilities;
3° TSOs assets, resources, revenue collection, financing, balance sheet.
It is key to treat these three levels of Europeanisation differently because of their

different institutional flexibility, industry sensitivity and European priority.
The first level (being: Information, data, calculation, analysis, proposals, etc.), can
easily be “regionalised” or “Europeanised” as soon as all the TSOs will (many already
do) see the benefits and start cooperating more. It is the story told by TSC, Coreso
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and the ENTSO-E voluntary regionalisation called “RSCIs”. It is already the practice
for producing the TYNDP as well as in existing regional planning. It is also
exemplified by the platforms built for the benefits of Day Ahead and Intraday markets.
The second level (decisions, actions, responsibility and liabilities) raises really critical
questions. They mainly deal with the difficulty of assigning decision powers to
different levels of TSO organisation (national TSOs, Regional RSCIs, European
“ISO”) having to co-exist and tightly coordinate altogether in system operation. In
practice, the transmission grid in Europe constitutes one single grid with so many
interactions that any splitting of decision-making (with possible overlapping between
the different levels) raises serious questions on separation of responsibilities and
liabilities between the different levels of decision making.
The third level (assets, resources, revenue collection, financing, balance sheet, etc.),
has for long been the hard core of resistance to regionalisation or Europeanisation of
EU transmission grids. Experts and academics can only see that the Nordic countries
and Germany still have not merged their TSOs while those are visibly smaller than
their respective wholesale markets: will national interests and national politics finally
unlock this deadlock? Two new “open fields” might bring some novelty there. On the
one hand, the creation of vast “off-shore” domains calls for new grids to be built from
scratch (architecture; technology; regulation; operation). New forms of governance
may arise. On the other hand, the still unsuccessful onshore “EU Super-grid” policy
may become reality anytime - if countries were agreeing on. An EU “Super-grid” could
start by being the mutualisation of existing lines within a “multi-MS corridor”. All these
existing lines could then be technologically upgraded to the highest standards and
jointly operated as a common EU backbone /EU corridor.
This general TSOs’ landscape having been addressed, we are going to recommend
some MS/EU governance checkpoints on the following lines.
On the hardware part of grid functions (grid investments & connections) the main
concern is to keep national grids expansion providing access and connexion to the
other national markets as if only one fully European market was existing. At some
point this key European principle will have to be translated into a mutualised
governance being put above (or across) the TSO borders.
TSOs should regionalise by themselves the “light dimension” of their grid planning
(data; methodology) as they already did for system analysis. At least voluntarily (as
with ENTSO-E RSCIs). Once mature enough, this could become an EU kind of
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“legally binding Light ISO” (collecting data; performing more advanced calculation
with more robust scenarios; offering menus for national TSOs decision making) with
an amendment to 3d Package voted as an ordinary EU law. At a further stage,
coming from a “Nordic” or “Pentalateral”-like cooperation between voluntary MS,
some RTOs might emerge. It might well be a North-Sea off-shore grid entity or an
onshore Super-grid corridor’s one (twinning a kind of mutualisation of off-shore
support schemes and support policies among the same MS). Parallel to this
reinforced TSO cooperation, ACER should receive strengthened powers mirroring this
TSOs planning governance to check if EU common interest principles are reasonably
implemented.
On the software part (operation and interactions)
There are robust EU principles having being established. They come from the logic of
the EU building and the legal order of our constitutional treaty, plus some important
legal decisions (as DG COMP versus Swedish TSO Svenska Kraftnät). The EU TSOs
have no right to give systematic ex-ante preference to commodity trade and power
flows inside the borders of their control zones vis-a-vis the crossing of these borders.
Increased regionalisation of system operation for forecasting, capacity calculation,

proposals of menu of actions, and an efficient regional approach to “zoning grids and
markets” can be expected.
Other aspects of this MS/EU governance issue
This higher regionalisation of the EU grids and systems call for a deeper review of the
existing organisation of the NRAs as to get them engaged in the regionalisation of
grid planning and system operation. It also calls to review the internal governance of
both ENTSO-E and ACER. Should TSOs continue to managing ENTSO-e
simultaneously as their general assemblee, their executive board and their higher
European advocacy body – since the 3rd Package did not define more precisely
what a European statutory body is? And, symmetrically, should NRAs having to keep
a so unilateral power on the Board of ACER - except to mirror ENTSO-E? Could more
flexible or more pluralist forms of governance being explored on both sides?
Could the regulatory gap concerning Power Exchanges (PXs) being addressed too?
PXs manage core platforms of the EU internal market but are not proper parts of the
EU regulatory frame. They even claim being “free marketers” by statute. Could EU
law and regulation bridge that gap?
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How will the existing and coming grid codes continue to be updated and adapted to
the changing circumstances to come? What will be the respective roles of ENTSO-E,
ACER, NRAs, Third Parties and the EU Commission in this process?
As we have just seen, the EU has not yet found a stable frame of governance for a
deeper Europeanisation of its applied grid and market regulation, and of its applied
system operation.
b- Reliability & Adequacy dimension
On the hardware part of grid functions (grid investments & connections) a significant
regionalisation of the TSOs for security analysis, scenarios, and menus of actions is
also expected; as well as for the monitoring of MS “Security of Supply” infrastructure
planning consistency. How will TSOs, NRAs and ACER combine in the making of this
upgrade and the many other adaptations to come?
On the software part (operation and interactions) a similar regionalisation of the TSOs
when assessing generation adequacy of the regional MS is expected; setting
emergency scenarios consistent with regional generation adequacy arrangements;
suggesting arrangements for higher flexibilisation of regional supply and demand (it
however requires a consequent European legislative upgrade to touch upon
demand).
c- Low Carbon & Technological Wave dimension
On the hardware part of grid functions (grid investments and connections) an issue
arises as regional planning would be influenced by a regional TSOs entity while MS
will commit only on their own vis-a-vis Commission via National Action Plans. These
NAPs will enter as reference scenarios in the work process of the TSOs regional
entity through NRAs validation. Would this regional TSOs entity also act as a
consultant, advisor or reviewer of the NAPs in its region? How will a regional entity
organise its work to deliver to national scenarios a regional value added knowing that
systems at countries level will diverge regarding the set of technologies, the load and
demand characteristics as well as for reliability standards?
On the software part (operation and interactions) we might expect similar issues in
articulating regionalisation of TSOs with the MS commitments within NAPs; as well as
to articulating the new Fora to come and the more restricted mandate of certain NRAs
and of ACER.
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4.4.6 Secondary checkpoints for better governance between the local and the European
levels
Most of this issue “Local / European” happens at the infra-country level where MS
have an exclusive right to take decisions and frame regulation. It does not seem that
this will change. As the Energy Union will be defined and built within the existing
institutional frame it will take this as given.
Therefore, Energy Union has no blueprint for DSOs. It will let MS decide how they will
manage the DSOs and the articulation between their own DSOs and TSOs.
At the EU level, reinforced by the likely creation of an EU regulator, action will mainly
be indirect and come via the interfaces EU/TSOs or EU/NRAs that already exist; and
the new ones to come from the scenarios that we have explored. Some other lines of
action might also come from outside the energy industry; as from the “Digital Single
Market Strategy for Europe” where the EU is looking for a common frame for
platforms, online intermediaries, data and cloud, and the collaborative economy.
This said, at this “Local/European” level, variety and autonomy will flourish for long all
across the EU.
Conclusion for all governance issues
In terms of governance the EU is entering very challenging times due to the

“hybridation” of its systems and markets.
A big challenge –as we have seen- is the regionalisation of grid planning, system and
market operation which should deliver a better coordination or mutualisation of
hardware and software TSOs functions as well as of the NRAs actions. It also
touches MS policies regarding security of supply and generation adequacy. ACER
might become a good referee there, if allowed by a new legal frame.
As big (as a challenge) is the articulation between MS “2030 NAPs”, the grids, the
systems and the markets. No such articulation is provided yet but NAPs will ask for
some links and bridges between them as they become the actual “building blocks” of
EU level energy policy targets. MS NAPs should then be articulated in a certain way
with TSOs & DSOs actions.
Another key challenge is the articulation for local and national grids, systems and
pocket markets, between DSOs, TSOs, NRAs and MS. This concerns equally internal
market, reliability and adequacy, pluralism of low-carbon paths and openness to
innovation waves. While it will inevitably be said “national affairs only” it will actually
more and more become the foundations of the entire EU system and market
133
transformation. What will we, Europeans, get as governance for this local and
distributed process will be decided country by country with some indirect action via
the channels EU/TSOs or EU/NRAs. Will we be able to also create and informal
while; a reasonable “EU sunshine regulation” working through influence and good
reasoning? OCDE and IEA do work through influence and good reasoning every day.
Might we find a way to copy their recipe (see IEA 2015)?
134
5. General Conclusions
The EU power transmission enters a brand new world which has not been foreseen
by the former three “single energy market” packages. This is because major changes
are dictated by the need to simultaneously accomplish integration of European
energy markets and build a low‐carbon economy; and because these changes are
reinforced by a wave of coming or already come technological innovation.
Florence School of Regulation did build in this report a conceptual framework to

understand where the European power system and transmission networks are going
to; and what are the biggest challenges and alternatives for the EU power regulation
and governance.
Florence School of Regulation is not pushing any roadmap or blueprint. We are only
offering “food for thought”: knowledge frames to understand how the power
landscape moves. It will be up to decision makers and stakeholders to draw the
actual future that EU deserves and will get.
Our research report did give the reader five big contributions.
1°: An analysis of how “European Integration”, “Low-Carbon Target” and “Wave of

Innovation” shake up the EU power system and transmission industry.
2°: Three conceptual scenarios of evolution being: #1# Full European Market
Integration; #2# National only Low Carbon System & Policy; #3# Local only Low
Carbon System & Policy.
3° A detailed application of these scenarios to the core tasks performed by a typical

EU TSO: Hardware tasks (as network planning and investment); and Software tasks
(as balancing, congestion, cross-border exchange, market facilitation, relationships
with DSOs or NRAs, etc.).
4° A fourth scenario being “Hybrid” where Low-Carbon Target and Wave of

Innovation co-exist at three levels (European, National and Local) but with a
substantial regulatory gap if the current frame is not updated.
135
5° A set of check-points to build an EU multi-layer coordination frame and make our
power system transition to a European Low-Carbon System coherent, efficient and
resilient enough to succeed.
To conclude our work, we would like to draw attention to seven key points.
Firstly, although all three scenarios were constructed in order to fulfil EU energy and
climate policy objectives, no individual scenario can easily and fully meet all goals at
reasonable cost. It should be no surprise as in real life the societal expectations, the
technological developments and the public policies are not necessarily and not
always aligned.
Secondly, some critical system operational functions, currently mainly performed by
national TSOs, will be totally or partially performed by other entities. These entities
may be supra-national organizations, either emanating from or acting in close
cooperation with TSOs, DSOs (individually or somehow associated) or even new
players.
Thirdly, therefore, the legal and regulatory frameworks must be adapted, namely in
order to clearly define and assign each operational function, indicating, for each,
appropriate cost and liability sharing mechanisms. It is also needed to establish
appropriate coordination mechanisms, for both normal and abnormal situations,
including appropriate redundancy safeguards and supervision tools.
Fourthly, even if from the technical (system operation) point of view it is theoretically
possible to ensure appropriate system reliability (assuming that the necessary legal
and regulatory changes are implemented), several “black holes” may still jeopardize
the efficient functioning of electricity systems and markets. The Energy Union will
have to patch them.
Fifthly, assuming that, in the short-term, implementation of 3rd Package legislation and
associated Network Codes will continue and no fundamentally new legislation will be
issued, serious governance issues must be somehow addressed. In this respect, not
only national/EU interfaces require continuous attention; local/national interfaces
become increasingly critical for transparency and reliability.
Sixthly, among the many governance challenges to be addressed the following are
particularly important. 1° the regionalisation and Europeanisation of grid planning,
system and market operation, leading to better coordination or mutualisation of
hardware and software TSOs functions, as well as of the NRAs actions. 2° the
Member States policies regarding security of supply and generation adequacy. 3° the
articulation between Member States “2030 NAPs”, network investments, systems and
markets. 4° the articulation of local and national grids, systems and pocket markets,
implying new forms of multi-layer coordination between DSOs, TSOs, NRAs and
Member States.
Seventhly, in the past, voluntary, informal cooperation among major actors (namely
the European Commission, regulators and TSOs) has been crucial for the
development of the internal energy market. This kind of cooperation can still deliver
substantial results on the road to decarbonisation. However, the speed of delivering
136
the many missing “building blocks” for the proper functioning of the system (from
planning to real-time operation) needs to be considerably increased in the short-term.
For the Energy Union transition (to a low carbon economy in a European market open
to a wave of innovation) to succeed, governance and regulatory mechanisms have to
be quickly adapted and partially redesigned with the reliability “absolute must” in
mind.
137
138
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Progress Report #2. October 2014 – Mars 2015. A15-ERI-01
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Platforms”, Competition and Regulation in Network Industries, vol. 12, No. 3, pp.
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network: Consequences on long-term sustainability of the TSOs financial structure,
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Systems,” Harvard University, April.
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and regulation during the transition to low-carbon generation. Paris (forthcoming).
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Neighbours. Why do we need Intraday Flexibility in Germany? Intraday Trading
with(out) Borders: Status quo, Restrictions – and the Future.
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transmission charging methodology.
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mercado de electricidad regionales, PhD dissertation, Universidad Pontificia Comillas
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Florence School of Regulation
Robert Schuman Centre
for Advanced Studies
European University Institute

Via delle Fontanelle 19
I-50014 San Domenico di Fiesole (FI)
Italy
Contact FSR Research Coordinator:

Ilaria.Conti@EUI.eu
The Florence School of Regulation
The Florence School of Regulation (FSR) was founded in 2004 as a partnership between the Council of the European Energy
Regulators (CEER) and the European University Institute (EUI), and it works closely with the European Commission. The
Florence School of Regulation, dealing with the main network industries, has developed a strong core of general regulatory
topics and concepts as well as inter-sectoral discussion of regulatory practices and policies.
Complete information on our activities can be found online at: fsr.eui.eu
© European University Institute, 2015

Content © Authors, 2015
2 ■ FSR - Research Report ■ Issue 2015/01 ■ September 2015

FSR Report Electricity TSOs Future

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FLORENCE

electricity system in the EU

Fig. 1: The EU legal framework – electricity....................................................................................................................... 31

Box 1: Transmission system operation in the 1996 Directive.................................................................................... 15

1.1.1 The development of the European model 1996-2015

7 Article 14 of Directive 96/92/EC

Transmission system operation

TRANSMISSION SYSTEM OPERATION

Designation of Transmission System Operators

Tasks of Transmission System Operators

Each transmission system operator shall be responsible for:

Unbundling of Transmission System Operators

Dispatching and balancing

Confidentiality for Transmission System Operators

Inter transmission system operator compensation mechanism

Charges for access to networks

Provision of information on interconnection capacities

General principles of congestion management

1.1.2 The European legal framework

15 See list of cases in http://ec.europa.eu/competition/sectors/energy/electricity/electricity_en.html

(a) ensure the functioning of the energy market;

(b) ensure security of energy supply in the Union;

(d) promote the interconnection of energy networks.

For the purposes of this Directive, the following definitions apply:

13. ‘interconnector’ means equipment used to link electricity systems;

- Article 6 - “Promotion of regional cooperation”;

Tasks of transmission system operators

Each transmission system operator shall be responsible for:

(b) ensuring adequate means to meet service obligations;

Dispatching and balancing

Box 8: Collective EU transmission system operation in the 2009 Regulation

Tasks of the ENTSO for Electricity

3. The ENTSO for Electricity shall adopt:

(d) an annual work programme;

(e) an annual report;

(f) annual summer and winter generation adequacy outlooks.

(b) network connection rules;

(c) third-party access rules;

(d) data exchange and settlement rules;

(e) interoperability rules;

(f) operational procedures in an emergency;

(g) capacity-allocation and congestion-management rules;

(i) transparency rules;

(j) balancing rules including network-related reserve power rules;

(l) energy efficiency regarding electricity networks.

The Community-wide network development plan shall, in particular:

(c) identify investment gaps, notably with respect to cross-border capacities.

Box 9: Specification of TSO obligations at EU level

Amendments to Regulation (EC) No 714/2009

Regulation (EC) No 714/2009 is hereby amended as follows:

(1) Article 8 is amended as follows:

(a) in paragraph 3, point (a) is replaced by the following:

19 O.J. L 115/39 of 25.04.2013

Box 10: Basic types of EU secondary legislation 22

SECONDARY Regulation Directive

Fig. 1: The EU legal framework – electricity

REGULATION National Codes other regulation

Fig. 2: The typical national legal framework - electricity

1.1.3 The European “regulatory” framework

Fig. 3 describes the process leading to the approval of Network Codes.

Fig. 3: Development process of Network Codes 26

26 FWGL means framework guidelines and NC means network codes.

Adopted in  Size-dependent, technical requirements for Power Generating Modules

 European rules on how demand interacts with the transmission system